McKinsee Inc. is developing a plan to finance its asset base. The firm has $5,000,000 in current assets, of which 20% are

McKinsee Inc. is developing a plan to finance its asset base. The firm has $5,000,000 in current assets, of which 20% are permanent, and $12,000,000 in fixed assets. Long-term rates are currently 9.5%, while short-term rates are at 7%. McKinsee's tax rate is 30%.

a) Construct a conservative financing plan with 80% of assets financed by long-term sources. If McKinsee's earnings before interest and taxes are $6,000,000, what will their net income be?

b) An alternative and more aggressive plan would be to finance 60% of total assets with long-term financing. Assuming that EBIT was again $6,000,000, what will net income be under this alternative?

c) If interest rates were expected to increase, which plan would you recommend? Why?

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