ABC Company has the following assets:

Temporary Current Assets $ 1,800,000; Permanent Current Assets $ 1,200,000; Capital Assets $ 2,400,000

The Company is seeking to finance these assets with debt. They consider two options:

1. An option to use long term debt to finance 70% of the assets

2. An option to use short term debt to finance 60% of the assets

Short term rates are at 3% while long term interest rates are 5%.

EBIT is $1,380,000; tax rate is 50%

Solve;

a. Create and label two financial plans as conservative and aggressive

b. determine the EAT for each alternative

c. Calculate current ratio, return on assets

d. Provide narrative as to each alternative risk/return trade off