EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Transcribed Image Text:A company currently has $270,000 of equity and is planning a $120,000 expansion. The company currently earns $81,000 in net
income, and the expansion will yield $55,000 in additional income before any interest expense.
The company is considering three separate options: (1) do not expand, (2) expand and issue $120,000 in debt that requires payments
of 15% annual interest, or (3) expand and raise $120,000 from equity financing. For each option compute (a) net income and (b) return
on equity (Net income + Equity).
Note: Amounts to be subtracted should be indicated with a minus sign. Round "Return on equity" to 1 decimal place.
Dan't Expand Debt Financing Equity Financing
Income before interest expense
Interest expense
Net income
Equity
Return on equity
%
%
%
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