Christensen & Associates is development an asset financing plan. Christensen has $500,000 in current assets of which 15% are permanent, and $700,000 in fixed assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%.
Show a financing plan, conservative, with 80% of assets financed by long-term sources.
Show a financing plan, aggressive, with only 60% of assets financed financed by long-term sources.
If Christensen's earnings before interest and taxes are $325,000, what would be the net income under a aggressive plan? under a conservative plan? What could be the risks associated with the aggressive plan? the conservative plan?
Which plan would be recommendable by the CFO of Christensen? Why?
** Please see the attached file for the complete solution response **
current assets 500000
permanent current assets 75000
Temporary current assets 425000
fixed assets 700000
long term rate 11%
short term rate 8.50%
This solution provides a detailed a computation of the given accounting problem.