Lear, Inc.: Financing Permanent Current and Fixed Assets
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Foundations of Financial Management, 13th Edition
Working Capital Management
Working Capital and Financing Decisions
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.
b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $200,000. What will be Lear's earnings after taxes? The tax rate is 30 percent.
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Solution Summary
The solution examines financing permanent current and fixed assets for Lear, Inc.
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a.
Assets financed with long-term financing:
------------------------------------------------
Fixed assets $600,000
Half of permanent current assets $175,000
Cost of long term financing 10%
Interest costs $77,500
Assets financed with short-term financing:
--------------------------------------------------
Current assets $800,000
Half of permanent current assets $175,000
Cost of long term financing 5%
Interest costs ...
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