Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%. 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. B) If Christensen's earnings before interest and taxes are $325,000, calculate net income under each alternative. C) What are some of the risks associated with each plan? D) Which plan would you recommend to Christensen? Why?

Christensen & Assoc. is developing an asset financing plan. Christensen has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen's tax rate is 40%. 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. B) If Christensen's earnings before interest and taxes are $325,000, calculate net income under each alternative. C) What are some of the risks associated with each plan? D) Which plan would you recommend to Christensen? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 4P

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