Medical Equipment of Orlando Company is trying to develop an asset-financing plan. The firm has $500,000 in temporary current assets and $400,000 in permanent current assets. The company also has $600,000 in fixed assets.
Construct two alternative financing plans for Medical Equipment of Orlando. One of the plans should be conservative, with 75 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 40 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 12 percent on long-term funds and 6 percent on short-term financing.
Compute the annual interest payments under each plan. (Show your work)
Given that Medical Equipment of Orlando’s earnings before interest and taxes are $440,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 30 percent. Show your work.