Lear Inc. has $970,000 in current assets, $435,000 of which are considered permanent current assets. In addition, the firm has $770,000 invested in fixed assets.

a.

Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 9 percent. The balance will be financed with short-term financing, which currently costs 4 percent. Lears earnings before interest and taxes are $370,000. 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 $370,000. What will be Lears earnings after taxes? The tax rate is 40 percent.

Earnings after taxes

$