Analyze the incremental return of a $20,000 investment funded by

1. All equity

2. A blend of equity + loans

by first completing the Current income statement then making the stated adjustments to that case to create the All Equity and Equity Loan income statements.

Note: Incremental Net Income is the increase in Net Income in the two alternatives compared to the Current Case. Incremental ROE% is Incremental Net Income compared to Equity

All Equity Alternative Changes

1. $20,000 new furnishings funded by equity investment

2. Revenue increases 12%

3. 5 year straight-line depreciation

4. Additional payroll = $130/week

5. Other operating expenses increase $2,400/yr

6. No change to other direct expenses (except depreciation)

7. Income tax = 25% of Operating Income

Does incremental income yield 18% on equity investment?

50% Equity + 50% Loan Alternative Changes

1. $20,000 new furnishings funded by half by equity and half by loan

2. Revenue increases 12%

3. 5 year straight-line depreciation

4. Additional payroll = $130/week

5. Other operating expenses increase $2,400/yr

6. No change to other direct expenses (except depreciation)

7. Interest expense = 10% ax $10,000

8. Income tax = 25% of Operating Income

Does incremental income yield 18% on equity investment?

	Current		All Equity		Equity + Loan
Revenue	$210,000
Cost of Sales (30% of Revenue)	63,000
Payroll	50,000
Other Operating Expenses	20,000
Direct Expenses + Depreciation	40,000
Interest Expense	0
Operating Income
Taxes
Net Income After tax
Incremental Net Income	NA
Incremental ROE % Comment on the two scenarios. Which would you choose and why? Consider the 18% requirement.