Lionel Manufacturing is trying to develop an asset-financing plan. The firm has $500,000 in temporary current assets and $400,000 in permanent current assets. The company also has $600,000 in capital assets. Assume a tax rate of 30%.

Required:

a. Develop two alternative financing plans for Midtown. One of the plans should be conservative with 80% of assets financed by long-term sources and the other should be aggressive with only 30% of assets financed by long-term sources. The current interest rate is 15% on long-term funds and 10% on short term financing. (4 marks)

b. Given that earnings before interest and taxes are $300,000 calculate earnings after taxes for each of your alternatives. (4 marks)

c. Advise Lionel Manufacturing which plan they should implement, and the risks associated with that plan. (4 marks)