Question: Guardian, Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. $500,000 in fixed assets. Assume a tax rate of 40%
Q1. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75% of assets financed by long-term sources, and the other should be aggressive, with only 56.25 % of assets financed by long-term sources. The current interest rate is 15% on long-term funds and 10% on short-term financing.
Q2. Given Guardian's earnings before interest and taxed are $200,000, calculate earnings after taxes for each of your alternatives.
Q3. What would happen if the short-term and long-term rates were reversed?