Leverage

Enrietto Aquatic Products' offer to acquire Fiberglass Products for $2,000,000 cash has been accepted. Enrietto has $1,000,000 of liquid assets that can be converted into cash and plans to either sell common stock or issue bonds to raise the remaining $1,000,000. Before this acquisition, Enrietto's condensed balance sheet and condensed income statement were as follows:

Enrietto's policy is to pay 60% of net income to stockholders as dividends. Enrietto expects to be able to raise the $1,000,000 it needs for the acquisition by selling 50,000 shares of common stock at $20 each or by issuing $1,000,000 of 20-year, 12% bonds. Enrietto expects income from operations to grow by $700,000 after Fiberglass Products has been acquired. (Interest expense will increase if debt is used to finance the acquisition.)

Determine the return on equity (net income/total equity) before the acquisition and for both financing alternatives (round percentages to 2 decimal places). The return on equity before the acquisition 27.5% The return on equity after acquisition if bonds are issued? ?% The return on equity after acquisition if common stock is sold 28.9% If Enrietto sells additional stock, what will be the cash outflow for dividends? If Enrietto sells bonds, what will be the net cash outflows for new interest and for all dividends