MGT203: Basic Managerial Finance Assignment 3 - Short term and long term financing MGT203 Managerial Finance

Assignment 3 Lesson 6: Conservative versus aggressive financing

I. What are the differences between short-term financing and long-term financing? Describe their pros and cons.

II. Guardian Inc. is trying to develop an asset-financing plan. The firm has $480,000 in temporary current assets and $380,000 in permanent current assets. Guardian also has $580,000 in fixed assets. Assume a tax rate of 40 percent.

Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 60 percent of assets (temporary current assets + permanent current assets + fixed assets) financed by long-term sources, and 40% of assets financed by short-term sources. The other should be aggressive, with only 56.25 percent of assets financed by long-term sources, and the remaining 43.75 financed by short-erm sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing. a. How much long-erm source loan and short-term source loan is considered for Conservative approach. b. How much long-erm source loan and short-term source loan is considered for aggressive approach. c. Compute the annual interest payments under conservative and aggressive plans. d. Given that Guardians earnings before interest and taxes are $360,000, calculate earnings after taxes for each of your alternatives.