Sherlock Homes, a manufacturer of low cost mobile housing, has $5,000,000 in assets.

Temporary current assets $2,000,000

Permanent current assets 1,550,000

Capital assets 1,450,000

Total assets $5,000,000

Short-term rates are 10 percent. Long-term rates are 15 percent. (Note that longterm rates imply a return to any equity). Earnings before interest and taxes are $1,060,000. The tax rate is 20 percent.

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 after taxes be? For an example of perfectly hedged plans, see Figure 6-8.