JenCo is planning to expand their business. The expansion will require new assets totaling AED 15,000,000; 70% will be the fixed assets and 40% of the total current assets will be permanent innature. JenCo is considering two alternative asset-financing plans.
Plan 1: Under this plan, all fixed assets and permanent current assets will be financed using long-term debt; the rest of the assets will be financed using short-term funds.
Plan 2: Under this plan, all fixed assets and 50% of the permanent current assets will be financed using long-term funds and the balance will be in short-term loans.
The cost of long-term financing is 12% and short-term at 9%. The expansion is expected to generate additional earnings before interest and tax of AED 8,500,000. JenCo pays tax at the rate of25%.
Question:
1: Calculate the net earnings after tax under each plan and show all of your calculations clearly.
2: Also define that what is therelation between Exchange Rate and theInterest Rate? If exchange rate increasesthen what will be the effect on interest rate....vice versa?