financing alternative? 2. The Columbia Manufacturing Company has been asked by its banker to indicate whether it wants to renew all or any portion of its present borrowing against the credit line. The most recent balance sheet is shown as follows (in millions of dollars): Current Fixed anets Total assets $55.00 100.00 $155.00 Accounts payable $15.00 Note payable 20.00 Long-term debt 50.00 Equity 70.00 Total daima $155.00 Columbia's most recent income statement is shown as follows (in millions of dollars): Earnings before interest and taxes $30.00 Interest (notes payable) 1.60 Interest (long-term debt) 4.50 Earnings before taxes 23.90 11.47 $12.43 17.76% Taxes (48%) Net income Return on equity The bank has informed Columbia that because its current ratio violates the minimum 2:1 stipulation, the credit line will be renewed at an interest rate that is three percentage points higher than the "prime" rate. Columbia would be able to renew any amount up to $20 million. Columbia is considering two alternatives to renewing the credit line. One is to borrow $20 million in long-term debt and completely repay the credit line borrowing The second would be to borrow $10 million on a long-term basis and renew $10 million on the credit line. In the coming year, the economic environment could be, in the words of Columbia's management, salutory, adequate, or illusive. Each economic environment outcome would have a different effect on the decision variables being considered here, as indicated. Salutory Adequate Illusive Earnings before interest and taxes (millions) $37.00 $32.00 $28.00 Prime rate 8% 7% 6% Long-term rate, $20 million principal 11% 11% 11%. Long-term rate, $10 million principal 10% 10% 10%