Sherlock Homes, a manufacturer of low-cost mobile housing, has $4,500,000 in assets.

Temporary current assets	$1,000,000
Permanent current assets	1,500,000
Capital assets	2,000,000
Total assets	$4,500,000

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 $960,000. The tax rate is 40 percent. Assume the term structure of interest rates becomes inverted, with short-term rates going to 12 percent and long-term rates 4 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 $