FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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The question number 1 I already aswered, please send me just the 2 question.
| Mack Company, HappyDay’s branch, plans to invest $50,000 in land that will | |||||
| produce annual rent revenue equal to 15 percent of the investment, starting | |||||
| on January 1, Year 3. The revenue will be collected in cash at the end of each year, | |||||
| starting December 31, Year 3. Mack can obtain the cash necessary to purchase the | |||||
| land from two sources. Funds can be obtained by issuing $50,000 of 10 percent, | |||||
| five-year bonds at their face amount. Interest due on the bonds is payable on | |||||
| December 31 of each year with the first payment due on December 31, 2021. | |||||
| Alternatively, the $50,000 needed to invest in land can be obtained from equity | |||||
| financing. In this case, the stockholders (holders of the equity) will be paid a $5,000 | |||||
| annual cash dividend. Mack Company is in a 30 percent income tax bracket. | |||||
| 1. Prepare an income statement and statement of |
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| for Year 3 under the two alternative financing proposals (debt financing and equity financing) | |||||
| Mack Company | |||||
| Income Statements Year 3 | |||||
| DEBIT FINANCING | EQUITY FINANCING | ||||
| Rental Revenue | $ 7,500.00 | $ 7,500.00 | |||
| Interest expense | $ (5,000.00) | ||||
| Earning before int and taxes | $ 2,500.00 | ||||
| less taxes 30% | $ (750.00) | $ (2,250.00) | |||
| Earning after Int and taxes | $ 1,750.00 | $ 5,250.00 | |||
| Net Earnings | $ 1,750.00 | $ 5,250.00 | |||
| Investiment | $ 50,000.00 | ||||
| Annual rental value % | 15% | ||||
| Annual rental value | $ 7,500.00 | ||||
| Debt | $ 50,000.00 | ||||
| Cost of debt | 10% | ||||
| Statements of Cash Flows | |||||
| Operating Activities | |||||
| Gross Cash flow | $ 7,500.00 | $ 7,500.00 | |||
| Expenses paid interest | $ (5,000.00) | ||||
| Taxes expense | $ (750.00) | $ (2,250.00) | |||
| Net Cash flow Oper Act | $ 1,750.00 | $ 5,250.00 | |||
| Investing Activities | |||||
| Financing Activities | |||||
| Loan | $ 50,000.00 | ||||
| Equity issued | $ 50,000.00 | ||||
| Payment dividend | $ (5,000.00) | ||||
| Net Cash flow from Fin Act | $ 50,000.00 | $ 45,000.00 | |||
| Net Change in Cash | $ 51,750.00 | $ 50,250.00 | |||
| Add cash balance | |||||
| Ending cash balance | $ 51,750.00 | $ 50,250.00 | |||
| 2. Write a short memorandum explaining why one financing alternative | |||||
| provides more net income but less cash flow than the other. |
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