P7-2 On February 4, 2002, The Wall Street Journal described one of the many complex transac- tions of Enron Corporation that was uncovered in the investigation of Enron's bankruptcy: 1. Enron Corporation created a subsidiary company named Enron Capital, located in Caicos, a Caribbean tax haven. 2. Enron Capital sold $214 million in monthly income preferred shares (MIPS) to in- vestors via investment banking firm Goldman Sachs. 3. Enron Capital loaned the $214 million to Enron Corporation. It was reported on En- ron's balance sheet as "preferred stock of subsidiary companies." Enron Corporation made payments to Enron Capital, deducting them as interest payments on debt on its tax return. 5. Enron Capital paid dividends to the holders of the MIPS. Required: a. What impact would treating the MIPS as debt for tax purposes and equity for financial accounting purposes have had on Enron's net income, debt-to-equity ratio, and accounting return on equity ratio compared to treating the MIPS as debt for both tax purposes and financial accounting purposes? b. What impact would treating the MIPS as debt for tax purposes and equity for finan- cial purposes have had on Enron's market-to-book ratio compared to treating the MIPS as debt for both tax purposes and financial accounting purposes?

-2 On February 4, 2002, The Wall Street Journal described one of the many complex transactions of Enron Corporation that was uncovered in the investigation of Enron's bankruptcy: 1. Enron Corporation created a subsidiary company named Enron Capital, located in Caicos, a Caribbean tax haven. 2. Enron Capital sold $214 million in monthly income preferred shares (MIPS) to investors via investment banking firm Goldman Sachs. 3. Enron Capital loaned the $214 million to Enron Corporation. It was reported on Enron's balance sheet as "preferred stock of subsidiary companies." 4. Enron Corporation made payments to Enron Capital, deducting them as interest payments on debt on its tax return. 5. Enron Capital paid dividends to the holders of the MIPS. Required: a. What impact would treating the MIPS as debt for tax purposes and equity for financial accounting purposes have had on Enron's net income, debt-to-equity ratio, and accounting return on equity ratio compared to treating the MIPS as debt for both tax purposes and financial accounting purposes? b. What impact would treating the MIPS as debt for tax purposes and equity for financial purposes have had on Enron's market-to-book ratio compared to treating the MIPS as debt for both tax purposes and financial accounting purposes