McKinsee Inc. is developing a plan to finance its asset base. The firm has $3,000,000 in current assets, of which 20% is permanent, and $10,000,000 is in fixed assets. Long-term rates are currently 8%, while short-term rates are at 6%. McKinsee's tax rate is 30%.
a) Construct a conservative financing plan with 80% of the assets financed by long-term sources. If McKinsee's earnings before interest and taxes are $4,500,000, what will its net income be?
b) An alternative and more aggressive plan would be to finance 60% of total assets with long-term financing. Assuming that EBIT was again $4,500,000, what will net income be under this alternative