Nighthawk Steel, a manufacturer of specialized tools, has $5,280,000 in assets. Temporary current assets $1,260,000 Permanent current
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Nighthawk Steel, a manufacturer of specialized tools, has $5,280,000 in assets.
Temporary current assets | $1,260,000 | |
Permanent current assets | 1,760,000 | |
Capital assets | 2,260,000 | |
Total assets | $5,280,000 | |
Short-term rates are 5 percent. Long-term rates are 7.5 percent. (Note that long‐term rates imply a return to any equity). Earnings before interest and taxes are $1,090,000. The tax rate is 25 percent. Assume the term structure of interest rates becomes inverted, with short-term rates going to 10 percent and long-term rates 5 percentage points lower than short-term rates.
If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing, what will earnings be after taxes?
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