Guardian Inc. is trying to develop an asset-financing plan. The firm has $430,000 in temporary current assets and $330,000 in permanent current assets. Guardian also has $530,000 in fixed assets. Assume a tax rate of 30 percent. (Do not round intermediate calculations. Round your answers to the nearest whole number.) a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 5 percent on short-term financing. Compute the annual interest payments under each plan.
Annual Interest
Conservative $
Aggressive $
b. Given that Guardian’s earnings before interest and taxes are $310,000, calculate earnings after taxes for each of your alternatives.
Earnings
After Taxes
Conservative $
Aggressive $
c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?
Conservative Aggressive
Total interest $ $
Earnings after taxes $ $

A. Annual Interest

Conservative $145,770

Aggressive $115,294

B. Earnings After Taxes

Conservative $114,961

Aggressive $136,294

C.Conservative Aggressive

Total interest $73,530 $104,006

Earnings after taxes $165,529$144,196

Explanation:

A. Computation for the annual interest payments under each plan.

First step is to calculate the Total Assets

Temporary current assets$430,000

Permanent current assets$330,000

Fixed Assets$530,000

Total Assets$1,290,000

Now let compute the annual interest payments under each plan

CONSERVATIVE APPROACH total interest

Long term interest

[$1,290,000 *90%* 12%]$139,320

Short term interest

[$1,290,000*10%*5%]$6,450

(100%-10%=90%)

Total$145,770

AGGRESSIVE APPROACH total interest

Long term interest

[$1,290,000 *56.25%* 12%]$87,075

Short term interest

[$1,290,000*43.75%*5%]$28,218.8

(100%-56.25%=43.75%)

Total$115,294

Therefore the is Annual Interest

Conservative $145,770

Aggressive $115,294

b. Calculate to determine the earnings after taxes for each the alternatives.

CONSERVATIVEAGGRESSIVE

EBIT$310,000$310,000

Less: Interest$145,770$115,294

EBT$164,230$194,706

Less: Tax 30%($49,269) ($58,412)

Earnings after tax$114,961$136,294

Therefore the Earnings After Taxes is

Conservative $114,961

Aggressive $136,294

c. Calculation to determine What would the annual interest and earnings after taxes for the conservative and aggressive strategies

CONSERVATIVE APPROACH total interest

Long term interest

[$1,290,000 *90%* 5%]$58,050

Short term interest

[$1,290,000*10%*12%]$15,480

(100%-10%=90%)

Total$73,530

AGGRESSIVE APPROACH total interest

Long term interest

[$1,290,000 *56.25%* 5%]$36,281.3

Short term interest

[$1,290,000*43.75%*12%]$67,725

(100%-56.25%=43.75%)

Total$104,006

CONSERVATIVEAGGRESSIVE

EBIT$310,000$310,000

Less:Interest$73,530 $104,006

EBT$236,470$205,994

Less: Tax 30% $70,941 $61,798

Earnings after tax$165,529$144,196

Therefore What would the annual interest and earnings after taxes for the conservative and aggressive strategies is:

Conservative Aggressive

Total interest $73,530 $104,006

Earnings after taxes $165,529$144,196