Concept explainers
1.
Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.
To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.
1.
Answer to Problem 7BTN
Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.
Explanation of Solution
- Computation of net income of the company when it issues 10% interest rate:
- Computation of net income when it issues note with 15% interest rate:
- Computation of net income of the company when it issues note with 16% interest rate:
- Computation of net income of the company when it issues note with 17% interest rate:
- Computation of net income of the company when it issues note with 20% interest rate:
Computation of ROE $100,000 note:
Computation of net income before interest expenses after issuance of $100,000 note:
- i. Computation of Interest expenses:
ii. Computation of total interest expenses after issuance of note:
Computation of ROE $100,000 note:
Working note:
- 1. Computation of Interest expenses:
2. Computation of total interest expenses after issuance of note:
Computation of ROE $100,000 note:
Working note:
- 1. Computation of Interest expenses:
2. Computation of total interest expenses after issuance of note:
Computation of ROE $100,000 note:
Working note:
- 1. Computation of Interest expenses:
Computation of total interest expenses after issuance of note:
Computation of ROE $100,000 note:
Working note:
1. Computation of Interest expenses:
2. Computation of total interest expenses after issuance of note:
2.
Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.
To determine: General rule the results above shows.
2.
Answer to Problem 7BTN
In order to give the shareholders better return company must opt for debt with low interest rate.
Explanation of Solution
Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.
Want to see more full solutions like this?
Chapter 10 Solutions
Financial Accounting: Information for Decisions
- Start with the partial model in Ch07 P26 Build a Model.xlsx on the textbook’s Web site. Traver-Dunlap Corporation has a 15% weighted average cost of capital (WACC). Its most recent sales were $980 million, and its total net operating capital is $970 million. The following table shows estimates of the forecasted growth rates, operating profitability ratios, and capital requirement ratios for the next three years. All of these ratios are expected to remain constant after the third year. Use this information to answer the following questions: Estimated Base Case Data for Traver-Dunlap CorporationForecast Year1 2 3Annual sales growth rate 20% 6% 6%Operating profitability (NOPAT/Sales) 12% 10% 10%Capital requirement (OpCap/Sales) 80% 80% 80%Tax rate 35% 35% 35% Return the growth rates to the original values. Now suppose that the capital requirement ratio can be decreased to 60% for all three years and thereafter. What is the new value of operations? Did it go up or down relative to the…arrow_forwardJoey Shamah and Scott Borba are the founders of e.l.f. Cosmetics. Assume that the company currently has $250,000 in equity and is considering a $100,000 expansion to meet increased demand. The $100,000 expansion would yield $16,000 in additional annual income before interest expense. Assume that the business currently earns $40,000 annual income before interest expense of $10,000, yielding a return on equity of 12% ($30,000/$250,000). To fund the expansion, the company is considering the issuance of a 10-year, $100,000 note with annual interest payments (the principal due at the end of 10 years). Required 1. Using return on equity as the decision criterion, show computations to support or reject the expansion if interest on the $100,000 note is (a) 10%, (b) 15%, (c) 16%, (d) 17%, and (e) 20%. 2. What general rule do the results in part 1 illustrate?arrow_forwardk ces You've collected the following information about Caccamisse, Incorporated: $ 250,000 $ 17,100 $ 5,900 $ 54,000 $ 85,000 Sales Net income Dividends Total debt Total equity a. What is the sustainable growth rate for the company? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. Assuming it grows at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. What growth rate could be supported with no outside financing at all? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Sustainable growth rate b. Additional borrowing c. Growth rate % %arrow_forward