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. the balance will be financed with short-term financing, which 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.

$63,875

Explanation:

Temporary current assets  =Current assets – permanent current assets

                                            =$800,000 – $350,000 = $450,000

Short-term interest expense  will be computed as:-

= 5% [$450,000 + ½ ($350,000)]

= $31,250

Long-term interest expense  will be computed as:-

= 10% [$600,000 + ½ ($350,000)]

= $77,500

Total interest expense is the sum of the two interest expenses:-

= $31,250 + $77,500

= $108,750

Lear Inc Earnings before interest and taxes    =   $200,000

Interest expense                                      = - $ 108,750

Earnings before taxes                                  =   $91,250

Taxes @ 30% rate ($91,250  X30%)                  = - $27,375

Earnings after taxes                                    =   $63,875

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