(Answered) Dynamo hydraulics has 9000000 in current assets of which

Economics

Dynamo Hydraulics has $9,000,000 in current assets of which $4,000,000 are considered permanent current assets. The firm also has an additional $6,000,000 invested in fixed assets. Dynamo's CFO is considering two possibilities: (1) He could finance all fixed assets and half of the company's permanent current assets with long term financing costing 7%. The rest of the assets are financed with short term credit at 4%. Dynamo's earnings before interest and taxes are $3,000,000. Determine Dynamo's earnings after tax under this arrangement, given that the tax rate is 30%. (2) The CFO's alternative is to finance all fixed assets and permanent current assets plus half of its temporary current assets with long term financing and the rest with short term finance. The same interest rates and the same tax rate apply as in part (1). (3) Which is the better financing alternative?

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