E11-13 and E11-14

E11-13 Kojak ceeds to redeem all of its outstanding bond tion is available for the company for 2017 and 2016. Corporation decided to issue common stock and used the $300,000 pro- Calculate ratios to evaluate s on January 1, 2017. The following informa- profitability and solvency (LO 4), AN 2017 2016 Net income Dividends declared for preferred stockholders Average common stockholders' equity Total assets Current liabilities Total liabilities S 182,000 150,000 8,000 700,000 1,200,000 1,200,000 100,000 500,000 8,000 1,000,000 100,000 200,000 Instructions (a) Compute the return on common stockholders' equity for both years. (b) Explain how it is possible that net income increased but the return on common stock- holders' equity decreased (c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency E11-14 Baja Airlines is considering these two alternatives for financing the purchase of a Compare issuance of stock financing to issuance of bond financing (LO 4), AN fleet of airplanes: 1. Issue 50,000 shares of common stock at $40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2, Issue 12%, 10-year bonds at face value for $2,000,000. It is estimated that the company will earn $800,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90,000 shares of common stock outstanding prior to the new financing Instructions Determine the effect on net income and earnings per share for (a) issuing stock and (b) issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year