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Foundations Of Financial Management
Found in: Page 187
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

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Short Answer

Guardian Inc. is trying to develop an asset financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate earnings after taxes for each of your alternatives.

The earnings after tax will be $21,000 in the conservative approach and $27,750 in the aggressive approach.

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Step by Step Solution

Information given in the question

The following information is provided:

Temporary current assets =$400,000

Permanent current assets =$300,000

Fixed assets =$500,000

Total assets =$1,200,000

Tax rate = 40%

Calculation of earnings after taxes in the conservative approach

The earnings after taxes will be $21,000 in the conservative approach.

Calculation of earnings after taxes in the aggressive approach

The earnings after taxes will be $27,750 in the aggressive approach.

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