Collins Systems Inc. is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in capital assets. Assume a tax rate of 40 percent. a. Construct two alternative financing plans for Collins. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other should be aggressive, with only 30 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing. Conservative Aggressive Total interest charge $ $ b. Given that Collin's earnings before interest and taxes are $180,000, calculate earnings after taxes for each of your alternatives. Earnings after taxes $ $ Conservative Aggressive c. What would happen if the short- and long-term rates were reversed?
Collins Systems Inc. is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in capital assets. Assume a tax rate of 40 percent. a. Construct two alternative financing plans for Collins. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other should be aggressive, with only 30 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing. Conservative Aggressive Total interest charge $ $ b. Given that Collin's earnings before interest and taxes are $180,000, calculate earnings after taxes for each of your alternatives. Earnings after taxes $ $ Conservative Aggressive c. What would happen if the short- and long-term rates were reversed?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem 6-18
Collins Systems Inc. is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in
permanent current assets. Collins also has $400,000 in capital assets. Assume a tax rate of 40 percent.
a. Construct two alternative financing plans for Collins. One of the plans should be conservative, with 80 percent of assets financed by
long-term sources, and the other should be aggressive, with only 30 percent of assets financed by long-term sources. The current
interest rate is 15 percent on long-term funds and 10 percent on short-term financing.
Conservative
Aggressive
b. Given that Collin's earnings before interest and taxes are $180,000, calculate earnings after taxes for each of your alternatives.
Conservative
Aggressive
Total interest
charge
$
$
Conservative
Aggressive
Earnings after
taxes
$
$
c. What would happen if the short- and long-term rates were reversed?
Earnings after
taxes
$
$
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