Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%. A) Construct two financing plans—one conservative, with 80% of assets financed by long-term sources, and the other aggressive, with only 60% of assets financed by long-term sources. B) If Christensen's earnings before interest and taxes are $325,000, calculate net income under each alternative. C) What are some of the risks associated with each plan? D) Which plan would you recommend to Christensen? Why?
Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%. A) Construct two financing plans—one conservative, with 80% of assets financed by long-term sources, and the other aggressive, with only 60% of assets financed by long-term sources. B) If Christensen's earnings before interest and taxes are $325,000, calculate net income under each alternative. C) What are some of the risks associated with each plan? D) Which plan would you recommend to Christensen? Why?
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 9P
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Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%.
A) Construct two financing plans—one conservative, with 80% of assets financed by long-term sources, and the other aggressive, with only 60% of assets financed by long-term sources.
B) If Christensen's earnings before interest and taxes are $325,000, calculate net income under each alternative.
C) What are some of the risks associated with each plan?
D) Which plan would you recommend to Christensen? Why?
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