Problem 6-14 (Algo) Conservative versus aggressive financing [LO6-5]

Guardian Incorporated is trying to develop an asset-financing plan. The firm has $530,000 in temporary current assets and $430,000 in permanent current assets. Guardian also has $630,000 in fixed assets. Assume a tax rate of 30 percent.

1. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 70 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.

\begin{tabular}{|l|l|} \hline & Annual Interest \\ \hline Conservative & \\ \hline Aggressive & \\ \hline \end{tabular} c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed