The founder of Frenza asks us to assist her in accounting and analysis of the corporation's bonds, which have an annual contract rate of 8%. She wants to know the business and accounting implications of further debt issuances as she looks for ways to finance the growth of Frenza. The following Tableau Dashboard is provided to help us address her questions and provide recommendations for her business decisions. Frenza Bond Amortization Carrying Value Unamortized Discount $100,000 60. 88,000 000 $80,000 92,000 94,000 96,000 98,0 100,000 $60,000 $40,000 $20,000 $0 January 1, Year June 30, Year 1 December 31, June 30, Year 2 December 31, June 30, Year 3 December 31, 1 Year 1 Year 2 Year 3 Ch Cash & Inventory for Competing Companies Market Rate for Company Bonds Frenza Lika Nelo 10% Frenza 8% $50,000 Lika 6% $40,000 4% Nelo $30,000 2% $20,000 0% $10,000 Total Equity & Net Income $0 Frenza Lika Nelo Net Income $100,000 $190,000 $85,000 Total Equity $400,000 $530,000 $275,000 1. Based on the current market rates for bonds of Frenza, Nelo, and Lika, which of the following bonds do lenders believe has the highest risk level? 2. If Frenza decided to issue new bonds with a contract rate of 11%, would these new bonds be sold at a discount or premium based on the current market rate for Frenza bonds? 3. Frenza is planning an $160,000 expansion to launch a new product line. Frenza currently earns $100,000 in net income, and the new product line will yield $50,000 in additional income before any interest expense. Frenza has three options: (1) do not expand, (2) expand and issue $160,000 in debt that requires payments of 8% annual interest, or (3) expand and raise $160,000 from equity financing. For each option 1, 2, and 3, compute (a) net income and (b) return on equity (Net income = Equity). Ignore any income tax effects. Complete this question by entering your answers in the tabs below. Req 1 and 2 Req 3 Frenza is planning an $160,000 expansion to launch a new product line. Frenza currently earns $100,000 in net income, and the new product line will yield $50,000 in additional income before any interest expense. Frenza has three options: (1) do not expand, (2) expand and issue $160,000 in debt that requires payments of 8% annual interest, or (3) expand and raise $160,000 from equity financing. For each option 1, 2, and 3, compute (a) net income and (b) return on equity (Net income - Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.) Show less A 1 2 3 Don't Expand Debt Financing Equity Financing Income before interest expense Interest expense Net income Equity Return on equity % % %
