Guardian Inc. is trying to develop an asset-financing plan. The firm has $360,000 in temporary current assets and $260,000 in permanent current assets. Guardian also has $460,000 in fixed assets. Assume a tax rate of 40 percent.

a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 60 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing. Compute the annual interest payments under each plan.

Conservative

Aggressive

b. Given that Guardians earnings before interest and taxes are $240,000, calculate earnings after taxes for each of your alternatives

Congressive

Aggressive

. c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?

Total interest

Earnings after taxes