Lear, Inc., consists of $800,000 in current assets, $350,000 of which are considered permanent current assets. Additionally, the firm has $600,000 invested in fixed assets.
a) Lear wishes to finance all the fixed assets and half of its permanent current assets with long-term financing costing 10%. Short-term financing presently costs 5 percent. Lear's earnings before interest and taxes are $200,000. Find out the Lear's earnings after taxes under this financing plan. The tax rate is 30 %.
b) As an alternative, Lear might wish for 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. Determine the Lear's earnings after taxes? The tax rate is 30 %.
c) Describe some of the risks and cost considerations related with each of such alternative financing strategies?