Ravenswood, Inc. has the following financials:
Permanent Current Assets ...... $ 400,000
Total Current Assets ...... $ 975,000
Fixed Assets ...... $ 650,000
Long term Financing Cost ...... 9%
Short term financing Cost ...... 4%
EBIT ................ $ 175,000
Tax Rate .................. 40%
a. Ravenswood wishes to finance all fixed assets and half of its permanent current assets with long term financing. Determine Ravenswood’s earnings after taxes under this financing plan.
b. As an alternative, Ravenswood might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long‐term financing. What will be Ravenswood’s earnings after taxes?
c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?