A new company requires $1 million of financing and is considering two arrangements as shown in the table below. Amount Amount of of debt Before-tax Arrangement equity raised $700,000 cost of debt financing $300,000 # 1 8% per annum # 2 $300,000 $700,000 10% per annum In the first year of operations, the company is expected to have sales revenues of $500,000, cost of sales of $200,000, and general and administrative expenses of $100,000. The tax rate is 30%, and there are no other items on the income statement. All earnings are paid out as dividends at year-end.

A new company requires $1 million of financing and is considering two arrangements as shown in the table below. Amount Amount of of debt Before-tax Arrangement equity raised $700,000 cost of debt financing $300,000 # 1 8% per annum # 2 $300,000 $700,000 10% per annum In the first year of operations, the company is expected to have sales revenues of $500,000, cost of sales of $200,000, and general and administrative expenses of $100,000. The tax rate is 30%, and there are no other items on the income statement. All earnings are paid out as dividends at year-end.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 6P

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