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Colter Steel has $5,450,000 in assets
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?
Expert Solution
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.
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