Answered Essay: Assume the term structure of interest rates becomes inverted, with short-term rates goi

Colter Steel has $4,800,000 in assets.

Temporary current assets $ 1,600,000
Permanent current assets 1,530,000
Fixed assets 1,670,000
Total assets $ 4,800,000

Assume the term structure of interest rates becomes inverted, with short-term rates going to 12 percent and long-term rates 2 percentage points lower than short-term rates. Earnings before interest and taxes are $1,020,000. The tax rate is 40 percent.

Expert Answer


Colter Steel

Long-term financing need:

Permanent current assets$1,530,000

Fixed assets1,670,000


Short-term financing need:

Temporary current assets$1,600,000

Long-term interest expense$320,000

Short-term interest expense192,000

Total interest expense $512,000

EBIT $1,020,000

Interest expense512,000

Earnings before taxes$508,000


Earnings after taxes $304,800

Long-term interest expense =10%× $3,200,000 = $320,000

Short-term interest expense =12% × $1,600,000 = $192,000

Taxes = 40% × $508,000 = $203,200

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