1. Problem 6-14 Conservative versus aggressive financing [LO5] Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $520,000 in temporary current assets and $420,000 in permanent current assets. Collins also has $620,000 in fixed assets. (a) Construct two alternative financing plans for the firm. One of the plans should be conservative, with 60 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 20 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 13 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.(Omit the “$” sign in your response.) Total interest Conservative $ Aggressive $ (b) Given that Collins’s earnings before interest and taxes are $400,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 25 percent. (Omit the “$” sign in your response.) Earning after taxes Conservative $ Aggressive $ 3. Problem 6-8 Short-term versus longer-term borrowing [LO3] Biochemical Corp. requires $690,000 in financing over the next three years. The firm can borrow the funds for three years at 9.25 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 7.50 percent interest in the first year, 12.15 percent interest in the second year, and 8.25 percent interest in the third year. (a) Determine the total interest cost under each plan. (Omit the “$” sign in your response.) Interest cost Fixed cost financing $ Variable short-term financing $ (b) Which plan is less costly? Fixed cost plan Short-term plan 4. Problem 6-12 Matching asset mix and financing plans [LO3] Winfrey Diet Food Corp….
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