Guardian Inc.
Question
Guardian Inc. is trying to develop an asset-financing plan. The firm has $440,000 in temporary current assets and
$340,000 in permanent current assets. Guardian also has $540,000 in fixed assets. Assume a tax rate of 30 percent. (Do not round intermediate calculations. Round your answers to the nearest whole number.)
| a. | Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 60 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 11 percent on long-term funds and 6 percent on short-term financing. Compute the annual interest payments under each plan. |
| Annual Interest | |
| Conservative | $ |
| Aggressive | $ |
| b. | Given that Guardian’s earnings before interest and taxes are $320,000, calculate earnings after taxes for each of your alternatives. |
| Earnings After Taxes | |
| Conservative | $ |
| Aggressive | $ |
| c. | What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed? |
| Conservative | Aggressive | |
| Total interest | $ | $ |
| Earnings after taxes | $ | $ |
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