first Q

Sherlock Homes, a manufacturer of low cost mobile housing, has $5,000,000 in assets. Temporary current assets Permanent current assets Capital assets $2,000,000 1,550, cee 1,450,000 Total assets $5,000, see Short-term rates are 10 percent. Long-term rates are 15 percent. (Note that long-term rates imply a return to any equity). Earnings before interest and taxes are $1,060,000. The tax rate is 20 percent. If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For an example of perfectly hedged plans see Figure 68 Earnings after taxes $ Currently, Atlas Tours has $6 60 million in assets. This is a peak six-month period. During the other six months, temporary current assets drop to $550 000 Temporary current assets Permanent current assets Capital assets $1,350,000 2.100,00 3,150,000 Total assets 56,600,000 Short-term rates are 4 percent Long-term rates are 5 percent. Annual earnings before interest and taxes are 51.230,000. The tax rate is 38 percent a. If the assets are perfectly hedged throughout the year, what will earnings after taxes be? (Enter answers in whole dollar, not in million Earnings after taxes b. If short term interest rates increase to 5 percent when assets are at their lowest level what will earnings after taxes be? For an example of perfectly hedged glans see Edure 6-8 Earnings after taxes