Lear inc has 800,000 in current assets, 350,000 of whichareconsidered permanent current assets. In addition, the firmhas600,000 invested in fixed assets.
a)Lear wishes to finance all fixed assets and half ofitspermanent current assets with long term financing costing10percent. Short term financing currently costs 5 percent.Learâsearnings before interest and taxes are 200,000.Determine learâsearnings after taxes under this financingplan. The tax rate is 30percent.
b)As an alternative, Lear might wish to finance all fixedassetsand permanent current assets plus half of its temporarycurrentassets with long term financing. The same interest ratesapply asin part a. Earnings before interest and taxes will be200,000. What will be Learâs earnings after taxes? The taxrate is30 percent.
c)What are some of the risks and cost considerationsassociatedwith ach of these alternative financing strategies?
Lear inc has 800,000 in current assets, 350,000 of whichareconsidered permanent current assets. In addition, the firmhas600,000 invested in fixed assets.
a)Lear wishes to finance all fixed assets and half ofitspermanent current assets with long term financing costing10percent. Short term financing currently costs 5 percent.Learâsearnings before interest and taxes are 200,000.Determine learâsearnings after taxes under this financingplan. The tax rate is 30percent.
b)As an alternative, Lear might wish to finance all fixedassetsand permanent current assets plus half of its temporarycurrentassets with long term financing. The same interest ratesapply asin part a. Earnings before interest and taxes will be200,000. What will be Learâs earnings after taxes? The taxrate is30 percent.
c)What are some of the risks and cost considerationsassociatedwith ach of these alternative financing strategies?
Related questions
The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2017. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 10% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows:
| The Severn Company: Balance Sheet as of December 31, 2016 (Millions of Dollars) | ||||
| Current assets | $ 900.00 | Notes payable | $ 255.00 | |
| Net fixed assets | 450.00 | Long-term debt (10%) | 700.00 | |
| Common stock, $3 par | 60.00 | |||
| Retained earnings | 335.00 | |||
| Total assets | $1,350.00 | Total liabilities and equity | $1,350.00 | |
The Severn Company: Income Statement for Year Ended December 31, 2016 (Millions of Dollars)
| Sales | $2,475.00 |
| Operating costs | 2,227.50 |
| Earnings before interest and taxes (10%) | $247.50 |
| Interest on short-term debt | 16.00 |
| Interest on long-term debt | 70.00 |
| Earnings before taxes | $161.50 |
| Federal-plus-state taxes (40%) | 64.60 |
| Net income | $96.90 |
The probability distribution for annual sales is as follows:
| Probability | Annual Sales (Millions of Dollars) | |
| 0.30 | $2,250 | |
| 0.40 | 2,700 | |
| 0.30 | 3,150 |
Assuming that EBIT equals 10% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Do not round intermediate calculations. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130.
| ANNUAL SALES (MILLIONS OF DOLLARS) | EPS under the debt financing | EPS under the stock financing | ||
| $2,250 | $ | $ | ||
| âââ2,700 | $ | $ | ||
| âââ3,150 | $ | $ |
Calculate expected EPS under both debt and stock financing alternatives. Do not round intermediate calculations. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130.
Under the debt financing expected EPS is $
Under the stock financing expected EPS is $
Calculate ÏEPS under both debt and stock financing alternatives. Do not round intermediate calculations. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130.
Under the dept financing ÏEPS is $
Under the stock financing ÏEPS is $
Calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. [Hint: Notes payable should be included in both the numerator and the denominator of the debt-to-capital ratio.] Do not round intermediate calculations. Round your answers to two decimal places.
Under the debt financing:
| The debt ratio is | % |
| Times-interest-earned ratio is |
Under the stock financing:
| The debt ratio is | % |
| Times-interest-earned ratio is |
Which financing method do you recommend?
