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Nighthawk Steel, a manufacturer of specialized tools, has $5,280,000 in assets. Temporary current assets $1,260,000 Permanent current assets 1,760,000 Capital assets 2,260,000 Total assets $5,280,000

Nighthawk Steel, a manufacturer of specialized tools, has $5,280,000 in assets.

Temporary current assets $1,260,000
Permanent current assets 1,760,000
Capital assets 2,260,000
Total assets $5,280,000

Short-term rates are 5 percent. Long-term rates are 7.5 percent. (Note that longterm rates imply a return to any equity). Earnings before interest and taxes are $1,090,000. The tax rate is 25 percent. Assume the term structure of interest rates becomes inverted, with short-term rates going to 10 percent and long-term rates 5 percentage points lower than short-term rates.

If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing, what will earnings be after taxes? For an example of perfectly hedged plans, see Figure 68.

Earning after taxes $

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