17. tations hesis and Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6. st rates 4) 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 5% 8% 1-year T-bill at beginning of year 3 7% 1-year T-bill at beginning of year 4 10% 12. Colter Steel has $4,200,000 in assets. Matching as and financin (LO6-3) Temporary current assets $1,000,000 Permanent current assets 2,000,000 Fixed assets 1,200,000 w Total assets $4,200,000 Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 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? For a graphical example of perfectly matched plans, see Figure 6-5. /13. In Problem 12, assume the term structure of interest rates becomes inverted with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will earnings after taxes be? Impact of ter structure of i rates on finar plans Assume that Atlas Sporting Goods Inc. has $840,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will be 12 percent. If the firm goes with a short-term financing plan, the financing costs on the $840,000 will be 9 percent, and with a long-term financing plan the financing costs on the $840,000 will be 11 percent. (Review Table 6-11 for parts a, b, and c of this problem.) Compute the anticipated return after financing costs with the most aggressive asset financing mix. b. Compute the anticipated return after financing costs with the most conservative asset financing mix. Compute the anticipated return after financing costs with the two moderate approaches to the asset financing mix. d. If the firm used the most aggressive asset financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? Now assume the most conservative asset financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? Would it be higher or lower than the earnings per share computed for the most aggressive plan computed in part d? otimal policy mix 06-5) . . e. Boatler Used Cadillac Co. requires $850,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Ms. Boatler decides to do forecasting and predicts that if she utilizes short- term financing instead, she will pay 7.75 percent interest in the first year and 13.55 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly? Short-term versus longer-term borrowing (LO6-3) Riochemicol Corm dern n00. 3. Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent divi- dend payout. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. al financing