Chapter 3: Q14BP_b (page 187)

Guardian Inc. is trying to develop an asset financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.
b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate earnings after taxes for each of your alternatives.

Short Answer

Expert verified

The earnings after tax will be $21,000 in the conservative approach and $27,750 in the aggressive approach.

Step by step solution

Information given in the question

The following information is provided:

Temporary current assets =$400,000

Permanent current assets =$300,000

Fixed assets =$500,000

Total assets =$1,200,000

Tax rate = 40%

Calculation of earnings after taxes in the conservative approach

The earnings after taxes will be $21,000 in the conservative approach.

$\begin{array}{rcl} E a r n i n g a f t e r t a x e s & = & E a r n i n g s b e f o r e i n t e r e s t a n d t a x e s - I n t e r e s t E x p e n s e s - T a x e s \\ = & $ 200, 000 - $ 165, 000 - $ 14, 000 \\ = & $ 21, 000 \end{array}$

Calculation of earnings after taxes in the aggressive approach

The earnings after taxes will be $27,750 in the aggressive approach.

$\begin{array}{rcl} E a r n i n g a f t e r t a x e s & = & E a r n i n g b e f o r e i n t e r e s t a n d t a x e s - I n t e r e s t e x p e n s e s - T a x e s \\ = & $ 200, 000 - $ 153, 750 - $ 46, 250 \\ = & $ 27, 750 \end{array}$

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

Short Answer

Step by step solution

Information given in the question

Calculation of earnings after taxes in the conservative approach

Calculation of earnings after taxes in the aggressive approach

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Influences On Business

Strategic Analysis

Operational Management

Change Management

Strategic Direction

Managers

Study anywhere. Anytime. Across all devices.