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Question - The balance sheet for Agro Inc. shows current assets of $650,000 and capital assets of $1,200,000. Of the current assets, $300,000 can be considered permanent with the remainder being temporary. Agro is considering two different financing strategies for its assets:
1. All of the capital assets and half of the permanent current assets will be financed through long term debt at a rate of 8%. The remaining current assets will be financed with short term debt at a rate of 6%.
2. All of the capital assets and all of the permanent current assets will be financed through long term debt at a rate of 8%. The temporary current assets will be financed with short term debt at a rate of 6%.
Assuming that Agro will have earnings before interest and taxes of $400,000 and that Agro is subject to an effective tax rate of 40%, determine the earnings after taxes for each of the strategies. Which of the two would be considered the more aggressive strategy?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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