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Homework answers / question archive / Colter Steel has $5,450,000 in assets

Colter Steel has $5,450,000 in assets

Finance

Colter Steel has $5,450,000 in assets.

 

Temporary current assets $2,900,000

Permanent current assets  .. 1,595,000

Fixed assets 955,000

Total assets $5,450,000

 

Short-term rates are 7 percent. Long-term rates are 12 percent. Earnings before interest and taxes are $1,150,000. The tax rate is 20 percent.

 

If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be?

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Computation of Earnings after Taxes:

Long term financing needs:

Permanent current assets = 1,595,000

Fixed assets = 955,000

Long term financing needs = 2,550,000

 

Short term financing needs:

Temporary current assets = 2,900,000

Short term financing needs = 2,900,000

 

Long term interest = 2,550,000 * 12% = 306,000

Short term interest = 2,900,000 * 7% = 203,000

Total interest = 509,000

 

Earning before interest and taxes = $1,150,000

Less: Interest = 509,000

Earning before taxes = 641,000

Less: Taxes @ 20% = 128,200

Earning after taxes = 512,800

So, Earning after taxes is 512,800.