Lisa Corporation has 1,425,000 in current assets, out of which 637,500 are considered permanent current assets. In addition, the firm has 1,125,000 invested in fixed assets. Earnings before interest and taxes are estimated at 500,000. The company has two financing plans under consideration:

Plan 1: Lisa wishes to finance all fixed assets and permanent current assets with long-term financing costing 9 percent. Its temporary current assets will be financed with short-term financing, which currently costs 5 percent. The tax rate is 30 percent.

Plan 2: As an alternative, Lisa 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 tax rate and interest rates apply as in Plan 1.

Instructions:

a) Determine Lisas earnings after taxes under each financing plan.

b) Which plan should Lisa choose? Justify.

c) What are some of the risks and cost considerations associated with each of these financing plans?