Lear, Inc. has $800,000 in current assets, $350,000 of which are considered permanent current assets. In addition, the firm has $600,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Lear’s earnings before interest and taxes are $200,000. Determine Lear’s earnings after taxes under this financing plan.
The tax rate is 30 percent.

A. 175,000(half of working capital)+600,000(fixed assets)=775,000 in assets to be financed with LT Debt (10% interest rate)

The other $175,000(half of permanent current) will be financed at 5% as well as the 450,000 in variable current assets. ($625,000x.05)
Long term financing.
Can anyone tell me if one of these is correct? I have come out with these two figures but I am not sure which is the correct way to go.

EBIT: 200,000
LT Expense: 77500
ST Expense: +31250
EBT: =108750
Taxes (30%): -32625

Net Income: =76125 Or,

Long-term financing 775000
Short-term financing 625000

EBIT 200000
Less: Short-term interest 31250
Less: Long-term interest 77500
Less: Taxes 27375
EAT 63875

Well, looks like you're in quite the financial pickle, my friend. Let's break it down with a touch of humor.

First, we need to calculate the interest expenses for both the long-term and short-term financing options. For the long-term financing, we have $775,000 in assets, which means we'll be paying 10% interest on that. That comes out to a whopping $77,500. Ouch!

Now, for the short-term financing, we'll be paying 5% interest on the remaining $175,000 (half of the permanent current assets) and the variable current assets of $450,000. That gives us a total of $31,250. Not as bad as the long-term financing, but still a sting!

Now, let's deduct these interest expenses from our earnings before interest and taxes (EBIT) of $200,000. Subtracting the short-term interest of $31,250 and the long-term interest of $77,500, we're left with $91,250.

But wait, there's more! Uncle Sam wants a piece of the pie too. With a tax rate of 30%, we need to deduct $27,375 from our EBIT.

Drumroll, please! After all these deductions, our earnings after taxes (EAT) come out to $63,875.

So, to sum it up (and bring a smile to your face), Lear's earnings after taxes under this financing plan would be $63,875. It's not all fun and games in the world of finance, but hey, you've made it through with a pretty decent outcome! Keep on clowning around, my friend!

To determine Lear's earnings after taxes under this financing plan, we need to calculate the interest expenses on both long-term financing and short-term financing, and then deduct the taxes from EBT (Earnings Before Taxes).

First, let's calculate the interest expense on long-term financing:

Total assets to be financed with long-term debt:
Permanent current assets: $350,000
Fixed assets: $600,000
Total: $350,000 + $600,000 = $950,000

Interest expense on long-term financing (10% interest rate):
$950,000 * 10% = $95,000

Next, let's calculate the interest expense on short-term financing:

Variable current assets to be financed with short-term financing:
Current assets - Permanent current assets = $800,000 - $350,000 = $450,000

Interest expense on short-term financing (5% interest rate):
$450,000 * 5% = $22,500

Now, let's calculate Earnings Before Taxes (EBT) by subtracting the interest expenses from Earnings Before Interest and Taxes (EBIT):

EBT:
EBIT: $200,000
Less: Long-term interest: $95,000
Less: Short-term interest: $22,500
EBT = $200,000 - $95,000 - $22,500 = $82,500

Finally, let's calculate the earnings after taxes by applying the tax rate:

Taxes:
EBT: $82,500
Tax rate: 30%
Taxes = $82,500 * 30% = $24,750

Earnings After Taxes (EAT):
EBT: $82,500
Less: Taxes: $24,750
EAT = $82,500 - $24,750 = $57,750

Therefore, Lear's earnings after taxes under this financing plan would be $57,750.