Lear Inc. has $950,000 in current assets, $425,000 of which are considered permanent current assets. In addition, the firm has $750,000 invested in fixed assets.

a.

Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lears earnings before interest and taxes are $350,000. Determine Lears earnings after taxes under this financing plan. The tax rate is 40 percent.

Earnings after taxes

$

b.

As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $350,000. What will be Lears earnings after taxes? The tax rate is 40 percent.

Earnings after taxes

$