Christensen amp assoc is developing an asset financing plan, Ask an Expert

Management Studies

Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in fixed 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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