Item6

4points

eBook

Print

References

Check my workCheck My Work button is now enabled2

Item 6

Problem 6-14 Conservative versus aggressive financing [LO6-5]

Guardian Inc. is trying to develop an asset-financing plan. The firm has $450,000 in temporary current assets and $350,000 in permanent current assets. Guardian also has $550,000 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 70 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 12 percent on long-term funds and 7 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 $330,000, calculate earnings after taxes for each of your alternatives.

Conservative _____

Aggressive _____