Christensen & Assoc. is developing an asset financing plan. Christensen has $1,000,000 in current assets, of which 15% is permanent, and $700,000 is in fixed assets. The current long-term rate is 9%, and the current short-term rate is 6.5%. Christensen's tax rate is 30%.
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. If Christensen's earnings before interest and taxes are $525,000, calculate net income under each alternative.
b) What are some of the risks associated with each plan?
c) If the yield curve is steeply inverted, which financing plan should Christensen choose?

Question

Quizplus · Accepted Answer

The Answer of Christensen & Assoc. is developing an asset financing plan. Christensen has $1,000,000 in current assets, of which 15% is permanent, and $700,000 is in fixed assets. The current long-term rate is 9%, and the current short-term rate is 6.5%. Christensen's tax rate is 30%.
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. If Christensen's earnings before interest and taxes are $525,000, calculate net income under each alternative.
b) What are some of the risks associated with each plan?
c) If the yield curve is steeply inverted, which financing plan should Christensen choose?