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Annie Kavitha
Annie Kavitha, Master's Degree
Category: Business and Finance Homework
Satisfied Customers: 1024
Experience:  17 years of teaching experience and 5 years of online tutoring experience.
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Red Court, Inc., has $900,000 in current assets, $350,000 of

Customer Question

Red Court, Inc., has $900,000 in current assets, $350,000 of which are considered permanent

current assets. In addition, the firm has $600,000 invested in fixed assets.

a. Red Court wishes to finance all fixed assets and half of its permanent current

assets with long-term financing costing 10 percent. Short-term financing

currently costs 5 percent. Red Court’s earnings before interest and taxes are

$200,000. Determine Red Court’s earnings after taxes under this financing plan.

The tax rate is 30 percent.

b. As an alternative, Red Court might wish to finance all fixed assets and 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 $200,000. What will be Red Court’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?
Submitted: 8 years ago.
Category: Business and Finance Homework
Expert:  Annie Kavitha replied 8 years ago.

Edited by Annie Kavitha on 6/11/2010 at 2:02 AM EST