6 Colter Steel has $4, 200, 000 in assets Temporary current assets $1,000,000 Permanent current assets 2.000.000 Fixed assets 1.200.000 Total assets $4,200,000 Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 percent If long-term financing is perfectly matched(synchronized)with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For an example of perfectly matched plans, see Figure 6-5 Solution: Colter steel Long-term financing equals Permanent current assets $2,000,000 Fixed assets 200000 $3,200,000 Short-term financing equals Temporary current assets $l000.000 Long-term interest expense=13%X$3, 200,000 $416000 Short-term interest expense=8%X 1,000,000 80000 Total interest expense $496,000 Earnings before interest and taxes $9960 Interest expense 496.000 Earnings before taxes $500.000 Taxes(40%) 200000 Earnings after taxes $300,000 S-221 CopyrightC2005 by The McGraw-Hill Companies, IncCopyright © 2005 by The McGraw-Hill Companies, Inc. S-221 6-8. Colter Steel has $4,200,000 in assets. Temporary current assets................... $1,000,000 Permanent current assets................... 2,000,000 Fixed assets........................................ 1,200,000 Total assets...................................... $4,200,000 Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For an example of perfectly matched plans, see Figure 6-5. Solution: Colter Steel Long-term financing equals: Permanent current assets $2,000,000 Fixed assets 1,200,000 $3,200,000 Short-term financing equals: Temporary current assets $1,000,000 Long-term interest expense = 13% x $3,200,000 = $ 416,000 Short-term interest expense = 8% x 1,000,000 = 80,000 Total interest expense $ 496,000 Earnings before interest and taxes $ 996,000 Interest expense 496,000 Earnings before taxes $ 500,000 Taxes (40%) 200,000 Earnings after taxes $ 300,000