Guardian Inc. is trying to develop an asset-financing plan. The firm has $310,000 in temporary current assets and $210,000 in permanent current assets. Guardian also has $410,000 in fixed assets. Assume a tax rate of 20 percent.

Guardian Inc. is trying to develop an asset-financing plan. The firm has $310,000 in temporary current assets and $210,000 in permanent current assets. Guardian also has $410,000 in fixed assets. Assume a tax rate of 20 percent.

  1. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 60 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.
  2. b. Given that Guardian’s earnings before interest and taxes are $190,000, calculate earnings after taxes for each of your alternatives.
  3. 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?
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