Lear inc has 840,000 in current assets, 370,000 of which are considered permanent current assets. In addition, the firm has 640,000 invested in fixed assets.
a)Lear wishes to finance all fixed assets and half of its permanent current assets with long term financing costing 8 percent. Short term financing currently costs 7 percent. Lear's earnings before interest and taxes are 240,000.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 asset sand 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 240,000. What will be Lear's earnings after taxes? The tax rate is 30 percent.
c)What are some of the risks and cost considerations associated with each of these alternative financing strategies?