Sherlock Homes, a manufacturer of low-cost mobile housing, has $5,000,000 in assets. Temporary curent assets Permanent current assets Capital assets $1,100,000 1,700,000 2,200,000 $5,000,000 Total assets Short-term rates are 12 percent. Long-term rates are 8 percent. (Note that long-term rates imply a return to any equity) Earnings before Interest and taxes are $1,060,000. 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 (hedgech) with long-term asset needs, and the same is true of short-term financing, what will earnings be after taxes? For an example of perfect hedged plans see Figure 6 8 Eaming after taxes