Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 6, Problem 15P
Lear Inc. has
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear’s earnings before interest and taxes are
b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be
c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Give Answer Of Accounting Question
Domestic
Lear Incorporated has $900,000 in current assets, $400,000 of which are considered permanent current assets. In addition, the firm
has $700,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The
balance will be financed with short-term financing, which currently costs 5 percent. Lear's earnings before interest and taxes are
$300,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 30 percent.
Earnings after taxes
Chapter 6 Solutions
Foundations of Financial Management
Ch. 6 - Prob. 1DQCh. 6 - Prob. 2DQCh. 6 - Prob. 3DQCh. 6 - Prob. 4DQCh. 6 - “The most appropriate financing pattern would be...Ch. 6 - Prob. 6DQCh. 6 - Prob. 7DQCh. 6 - Prob. 8DQCh. 6 - What are three theories for describing the shape...Ch. 6 - Since the mid-1960s, corporate liquidity has been...
Ch. 6 - Gary’s Pipe and Steel Company expects sales next...Ch. 6 - Prob. 2PCh. 6 - Tobin Supplies Company expects sales next year to...Ch. 6 - Antivirus Inc. expects its sales next year to be...Ch. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Boatler Used Cadillac Co. requires $850,000 in...Ch. 6 - Biochemical Corp. requires $550,000 in financing...Ch. 6 - Sauer Food Company has decided to buy a new...Ch. 6 - Assume that Hogan Surgical Instruments Co. has...Ch. 6 - Assume that Atlas Sporting Goods Inc. has $840,000...Ch. 6 - Colter Steel has $4,200,000 in assets. Short-term...Ch. 6 - Prob. 13PCh. 6 - Guardian Inc. is trying to develop an asset...Ch. 6 - Lear Inc. has $840,000 in current assets, $370,000...Ch. 6 - Using the expectations hypothesis theory for the...Ch. 6 - Using the expectations hypothesis theory for the...Ch. 6 - Carmen’s Beauty Salon has estimated monthly...Ch. 6 - Prob. 19PCh. 6 - Eastern Auto Parts Inc. has 15 percent of its...Ch. 6 - Bombs Away Video Games Corporation has forecasted...Ch. 6 - Esquire Products Inc. expects the following...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Lear Incorporated has $1,020,000 in current assets, $ 460,000 of which are considered permanent current assets. In addition, the firm has $820, 000 invested in fixed assets. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 5 percent. Lear's earnings before interest and taxes are $420,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 30 percent. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $420,000. What will be Lear's earnings after taxes? The tax rate is 30 percent.arrow_forwardLear Incorporated has $810,000 in current assets, $355,000 of which are considered permanent current assets. In addition, the firm has $610,000 invested in fixed assets. a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 4 percent. Lear's earnings before interest and taxes are $210,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 40 percent. Earnings after taxes b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $210,000. What will be Lear's earnings after taxes? The tax rate is 40 percent. Earnings after taxesarrow_forwardBG Company has P8,000,000 in current assets, P3,500,000 of which are considered permanent current assets. In addition, the firm has P6,000,000 invested in fixed assets. BG Company wishes to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing costing 15%. Short-term financing currently costs 10%. BG Company's earnings before interest and taxes are P2,200,000. Income tax rate is 40%.How much would BG Company's earnings after taxes be under this financing plan? P112,500 O P85,000 P127,500 O P225,000arrow_forward
- Lear, Inc. has $1,000,000 in current assets, $430,000 of which are considered permanent current assets. In addition, the firm has $680,000 invested in capital assets. a. Lear wishes to finance all capital assets and half of its permanent current assets with long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Lear's earnings before interest and taxes are $280,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 30 percent. Earnings after taxes b. As an alternative, Lear might wish to finance all capital assets and permanent current assets plus half of its temporary current assets with long- term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $280,000. What will be Lear's earnings after taxes? The tax rate is 30 percent. Earnings after taxes c. Not available in Connect. $ $113400arrow_forwarda) Pavan Limited has made plans for the year 2022-23. It is estimated that the Company will employ total assets of 25,00,000; 30% of assets being financed by debt at an interest cost of 9%p.a. The direct cost for the year are estimated at 15,00,000 and all other operating expenses are estimated at 2,40,000. The sales revenue is estimated at 22,50,000. Tax rate is assumed to be 50%. Required to calculate: (i) Net profit margin (ii)Return on assetsarrow_forwardMuffin’s Masonry, Inc.’s, balance sheet lists net fixed assets as $19 million. The fixed assets could currently be sold for $29 million. Muffin’s current balance sheet shows current liabilities of $8.0 million and net working capital of $7.0 million. If all the current accounts were liquidated today, the company would receive $7.50 million cash after paying the $8.0 million in current liabilities. What is the book value of Muffin’s Masonry’s assets today and the market value of these assets? (Enter your answer in millions of dollars rounded to 2 decimal places.) current assets fixed assets totalarrow_forward
- ABC Company obtained a loan of $100,000 at 10% annual interest rate on January 1, 2022. The loan was used to finance a project that qualifies for capitalization of borrowing costs. The company incurs $2,000 in loan processing fees and $1,500-in legal fees related to the loan. The project is completed on December 31, 2022. The weighted average cost of capital of ABC Company is 12%. Compute the amount of borrowing costs to be capitalized and the amount to be expensed in the income statement for the year ended December 31, 2022.arrow_forwardCapital structure analysis) The Karson Transport Company currently has net operating income of $503,000 and pays interest expense of $195,000. The company lans to borrow $1.19 million on which the firm will pay 10 percent interest. The borrowed money will used to finance an investment that is expected to increase the m's net operating income by $403,000 a year. . What is Karson's times interest earned ratio before the loan is taken out and the investment is made? . What effect will the loan and the investment have on the firm's times interest earned ratio? . What is Karson's times interest earned ratio before the loan is taken out and the investment is made? he times interest earned ratio is times. (Round to two decimal places.)arrow_forwardMuffin's Masonry, Inc.'s, balance sheet lists net fixed assets as $24 million. The fixed assets could currently be sold for $39 million. Muffin's current balance sheet shows current liabilities of $10.5 million and net working capital of $9.5 million. If all the current accounts were liquidated today, the company would receive $7.75 million cash after paying the $10.5 million in current liabilities. What is the book value of Muffin's Masonry's assets today and the market value of these assets? (Enter your answer in millions of dollars rounded to 2 decimal places.) Current assets Fixed assets Total BOOK VALUE MARKET VALUE (in millions of dollars)arrow_forward
- Muffin’s Masonry, Inc.’s, balance sheet lists net fixed assets as $26 million. The fixed assets could currently be sold for $43 million. Muffin’s current balance sheet shows current liabilities of $11.5 million and net working capital of $10.5 million. If all the current accounts were liquidated today, the company would receive $7.85 million cash after paying the $11.5 million in current liabilities. What is the book value of Muffin’s Masonry’s assets today and the market value of these assets? (Enter your answer in millions of dollars rounded to 2 decimal places.) BOOK VALUE MARKET VALUE (in millions of dollars) Current assets Fixed assets Totalarrow_forwardOhio 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.…arrow_forwardHelparrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY