Boatler Used Cadillac Co. requires $940,000 in financing over the next two years. The firm can borrow the funds for two years at 11 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 7.25 percent interest in the first year and 12.55 percent interest in the second year. Assume interest is paid in full at the end of each year.

a. Determine the total two-year interest cost under each plan.

	Interest Cost
Long-term fixed-rate
Short-term variable-rate

b. Colter Steel has $5,550,000 in assets.

Temporary current assets	$	3,100,000
Permanent current assets		1,605,000
Fixed assets		845,000
Total assets	$	5,550,000

Short-term rates are 9 percent. Long-term rates are 14 percent. Earnings before interest and taxes are $1,170,000. 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?

Earnings after taxes