Problem 6-15 Alternative financing plans (LO6-5)Lear Inc. has $1,030,000 in current assets, $465,000 of which are considered permanent current assets. In addition, the firm has$830,000 invested in fixed assets.a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 9 percent. Thebalance will be financed with short-term financing, which currently costs 6 percent. Lear's earnings before interest and taxes are$430,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 40 percent.Earnings after taxesb. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assetswith long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interestand taxes will be $430,000. What will be Lear's earnings after taxes? The tax rate is 40 percent.Earnings after taxes

Earning before interest and taxes is $430,000 Tax rate 40% Long term financing cost is 9% Short term…

Answered: Lear Inc. has $1,030,000 in current…

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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Lichen Plc owns a machine that has a carrying value amount of $85,000 at the year-end of 31 March 2023. Its market value is $78,000 and costs of disposal are estimated at $2,500. A new machine would cost $150,000. Lichen Plc expects it to produce net cash flows of $30,000 per annum for the next three years. The cost of capital of Lichen Plc is 8%. Required: What is the impairment loss on the machine to be recognised in the financial statements at 31 March 2023 (Enter your answer to the nearest whole $).
A Ltd can invest in three out of the following four projects. The company’s cost of capital is 8%. The following is the details of the four projects:-Project 1: Investment is $66 000; Life of project is 3 years; Annual receipts is $31 000 per yearProject 2:Investment is $72 000; Life of project is 6 years; Annual receipts is $20 000 per yearProject 3:Investment is $60 000; Life of project is 8 years; Annual receipts is $16 000 per yearProject 4:Investment is $43 000; Life of project is 4 years; Annual receipts is $17 000 per yearRequired:Based on the information above, which project should be rejected? Show calculations and provide explanations.
Supa Inc. is considering plans A and B for financing their new Systems project of OMR 6 million. Plan A involves issuance of 250,000 shares of common stock at the current market price of OMR 2 per share. Plan B involves issuance of OMR 5 million, 8% bonds at face value. Income before interest and taxes on the new plant will be OMR2.5million. Income taxes are expected to be 20%. Supa, Inc. currently has 100,000 shares of common stock outstanding. Advice Supa Inc. as to which plan would be better and why? (The answer should show clear steps and calculations).
Intella's current assets total to $20 million versus $10 million of current liabilities, while AWD's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? OA. The transactions would improve Intella's financial strength as measured by its current ratio but lower AWD's current ratio. O B. The transactions would lower Intella's financial strength as measured by its current ratio but raise AWD's current ratio. O C. The transactions would have no effect on the firm' financial strength as measured by their current ratios. O D. The transactions would lower both firm' financial strength as measured by their current ratios. O E. The transactions would improve both firms' financial…
Ohio Quarry Inc. has $20 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 10 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 15 percent. Round your answers to the questions below to two decimal places. Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios).0% debt ratio: % 20% debt ratio: % 40% debt ratio: % Which capital structure yields the highest expected ROE? yields the highest expected ROE. Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 40 percent.0% debt ratio: % 20% debt ratio: % 40% debt ratio: % Which capital structure yields the highest ROE calculated in part c? yields the highest expected ROE.…
Randy Watson Music's reported net fixed assets of $14 million. The fixed assets could currently be sold for $19 million. The current balance sheet had current liabilities of $5.5 million and net working capital of $4.5 million. If all the current accounts were liquidated today, the company would receive $7.25 million cash after paying the $5.5 million in current liabilities. What is the book value of Randy Watson Music's assets today and the market value of these assets?
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ABC Co needs to purchase equipment for $2 million. It is estimated that the after- tax cash inflows from the project will be $210,000 annually in perpetuity. ABC Co has a market value debt-to-assets ratio of 60%. The firm's cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are 2% and 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the firm's existing operations. What is the dollar flotation cost for the proposed financing? $83,333 $88,000 $92,050 $79,840 $80,000
Bridgewater Associates invests $88 billion in each of Lucid Group, Inc. (LCID) and Tesla, Inc. (TSLA). Bridgewater has a “2 and 15” fee structure and its management fees and incentive fees are calculated independently at the end of each year. After one year, the investment in LCID is valued at $110 billion and the investment in TSLA is valued at $120 billion. The annual return to an investor in Bridgewater Associates is closest to A. 30.88%. B. 27.65%. C. 23.47%. D. 18.75%.
Renew Life Industries has an EBIT of $28 million, depreciation of $3 million and a tax rate of 38%. Renew Life invests $8 million in fixed assets and $13 million to increase current assets. Accounts payable is expected to increase by $3 million, accruals total $2 million, and liabilities increase to $6 million. Determine the available cash flow.
Muffin's Masonry Incorporated's balance sheet lists net fixed assets as $31 million. The fixed assets could currently be sold for $53 million. Muffin's current balance sheet shows current liabilities of $14.0 million and net working capital of $13.0 million. If all the current accounts were liquidated today, the company would receive $8.10 million cash after paying the $14.0 million in current liabilities What is the book value of Muffin's Masonry's assets today and the market value of these assets? Note: Enter your answers in millions of dollars rounded to 2 decimal places. (i.e., Enter 5,500,000 as 5.50.) Current assets Fixed assets Total BOOK VALUE MARKET VALUE (in millions of dollars) $ 0.00 $ 0.00
Hub and Less Inc. needs to maintain 5 percent of next-year's sales in net working capital. The firm is considering a 5-year project which will increase sales from their current level of $110,000 to $146,000, $150,000, $159,000, $163,000, and $157,000 for Years 1 to 5 of the project, respectively. What amount should be included in the project analysis cash flows for net working capital in the second year (Year 2) of the project?

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