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Lear Inc. has $1,000,000 in current assets, $450,000 of whichare considered permanent current assets. In addition, the firm has$800,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets andhalf of its permanent current assets with long-term financingcosting 9 percent. The balance will be financed with short-termfinancing, which currently costs 7 percent. Lear’s earnings beforeinterest and taxes are $400,000. Determine Lear’s earnings aftertaxes under this financing plan. The tax rate is 30 percent.

Earning After Taxes

b. As an alternative, Lear might wish to financeall fixed assets and permanent current assets plus half of itstemporary current assets with long-term financing and the balancewith short-term financing. The same interest rates apply as in parta. Earnings before interest and taxes will be $400,000.What will be Lear’s earnings after taxes? The tax rate is 30percent.

Earnings After Taxes

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Elin Hessel
Elin HesselLv2
28 Sep 2019

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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.Lear’searnings before interest and taxes are 200,000.Determine lear’searnings 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 Lear’s earnings after taxes? The taxrate is30 percent.

c)What are some of the risks and cost considerationsassociatedwith ach of these alternative financing strategies?

Sambonoza Enterprises projects its sales next year to be $5 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections):

1. Curret assets will equal 26 percent of sales, and fixed assets will remain at their current level of $1 million.

2. Common equity is currently $0.7 million, and the firm pays out half of its after-tax earning in dividends.

3. The firm has short-term payable and trade credit that normally equal 9 percent of sales, and it has no long-term debt outstanding.

What are Sambonoza's financing needs for the coming year?

The most recent financial statements for Moose Tours, Inc.,appear below. Sales for 2016 are projected to grow by 20 percent.Interest expense will remain constant; the tax rate and thedividend payout rate will also remain constant. Costs, otherexpenses, current assets, fixed assets, and accounts payableincrease spontaneously with sales.

MOOSE TOURS, INC.
2015 Income Statement
Sales $ 745,000
Costs 580,000
Other expenses 16,000
Earnings before interest and taxes $ 149,000
Interest expense 12,000
Taxable income $ 137,000
Taxes (35%) 47,950
Net income $ 89,050
Dividends $ 21,920
Addition to retained earnings 67,130

MOOSE TOURS, INC.
Balance Sheet as of December 31, 2015
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $ 20,440 Accounts payable $ 54,600
Accounts receivable 32,760 Notes payable 13,800
Inventory 69,720
Total $ 68,400
Total $ 122,920 Long-term debt $ 128,000
Fixed assets Owners’ equity
Net plant and equipment $ 480,000 Common stock and paid-in surplus $ 114,000
Retained earnings 292,520
Total $ 406,520
Total assets $ 602,920 Total liabilities and owners’ equity $ 602,920

What is the EFN if the firm was operating at only 80 percent ofcapacity in 2015? Assume that fixed assets are sold so that thecompany has a 100 percent asset utilization. (A negativeanswer should be indicated by a minus sign. Do not roundintermediate calculations and round your answer to the nearestwhole number, e.g., 32.)

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