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Nighthawk Steel, a manufacturer of specialized tools, has $5,460,000 in assets. Temporary current assets Permanent current assets Capital assets $1,320,000 1,820,000 2,320,000 Total assets $5,460,000
Nighthawk Steel, a manufacturer of specialized tools, has $5,460,000 in assets. Temporary current assets Permanent current assets Capital assets $1,320,000 1,820,000 2,320,000 Total assets $5,460,000 Short-term rates are 4 percent. Long-term rates are 6.5 percent. (Note that long-term rates imply a return to any equity). Earnings before interest and taxes are $1,120,000. The tax rate is 25 percent. Assume the term structure of interest rates becomes inverted, with short-term rates going to 9 percent and long-term rates 4.5 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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