Currently, Atlas Tours has $5.4 million in assets. This is a peak six-month period. During the other six months temporary current assets drop to $400,000 (for computation purposes still consider these temporary current assets). Temporary current assets $1,200,000 Permanent current assets 1,800,000 Capital assets 2,400,000 Total assets $5,400,000 Short-term rates are 4 percent. Long-term rates are 5 percent. Annual earnings before interest and taxes are $1,080,000. The
Currently, Atlas Tours has $5.4 million in assets. This is a peak six-month period. During the other six months temporary current assets drop to $400,000 (for computation purposes still consider these temporary current assets).
| Temporary current assets | $1,200,000 |
| Permanent current assets | 1,800,000 |
| Capital assets | 2,400,000 |
| Total assets | $5,400,000 |
Short-term rates are 4 percent. Long-term rates are 5 percent. Annual earnings before interest and taxes are $1,080,000. The tax rate is 38 percent.
a. If the assets are perfectly hedged throughout the year, what will earnings after taxes be? (Enter answers in whole dollar, not in million.)
Earnings after taxes $
b. If short-term interest rates increase to 5 percent when assets are at their lowest level, what will earnings after taxes be? For an example of perfectly hedged plans, see Figure 6–8 (Enter answers in whole dollar, not in million.)
Earnings after taxes $ 519560
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