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Problem 6-14 Conservative versus aggressive financing [LO6-5]Guardian Inc. is trying to develop an asset-financing plan. Thefirm has $370,000 in temporary current assets and $270,000 inpermanent current assets. Guardian also has $470,000 in fixedassets. Assume a tax rate of 30 percent. a. Construct twoalternative financing plans for Guardian. One of the plans shouldbe conservative, with 70 percent of assets financed by long-termsources, and the other should be aggressive, with only 56.25percent of assets financed by long-term sources. The currentinterest rate is 12 percent on long-term funds and 8 percent onshort-term financing. Compute the annual interest payments undereach plan. b. Given that Guardian’s earnings before interest andtaxes are $250,000, calculate earnings after taxes for each of youralternatives. c. What would the annual interest and earnings aftertaxes for the conservative and aggressive strategies be if theshort-term and long-term interest rates were reversed?
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