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Sherlock Homes, a manufacturer of low cost mobile housing, has $4,600,000 in assets. Temporary current assets $1,200,000 Permanent current assets 1,510,000 Capital assets 1,890,000 Total

Sherlock Homes, a manufacturer of low cost mobile housing, has $4,600,000 in assets.

Temporary current assets $1,200,000
Permanent current assets 1,510,000
Capital assets 1,890,000
Total assets $4,600,000

Short-term rates are 8 percent. Long-term rates are 13 percent. (Note that longterm rates imply a return to any equity). Earnings before interest and taxes are $980,000. The tax rate is 30 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.

Earnings after taxes $

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