Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You are about to form a corporation that will need $527,000 to start operations. One option (the no-debt option) for the corporation is to raise
You are about to form a corporation that will need $527,000 to start operations. One option (the no-debt option) for the corporation is to raise the $527,000 by selling 52,700 common shares to you. Another option (the debt option) for the corporation would be to borrow $263,500 from you at 4% and to sell you 26,350 common shares for $263,500. You expect the corporation to earn income from operations this year of $57,000 and to incur income tax at a 30% rate. You also expect total assets to remain at $527,000 throughout the year and liabilities to remain at an amount equal to the funds you lent the corporation because no new liabilities will be assumed. Furthermore, any net income will immediately be distributed to you through the payment of dividends. Consequently, retained earnings will be zero at year end. (a) Calculate the missing amounts for items [1] through [13]. (Round basic earnings per share to 2 decimal places, e.g. 5.24 and return on common shareholders' equity to 1 decimal place. e.g. 5.2%.) Income from operations Interest expense (4%) Income before income tax No-Debt Option $57,000 Debt Option: $57,000 0 [7] [1] [8] Income tax expense (30%) [2] 191 Net income [3] [10] Average total assets $527,000 $527,000 Average common shareholders' equity. $527,000 $263,500 Number of common shares Basic earnings per share Dividends declared Payout ratio Return on common shareholders' equity 52,700 26,350 [4] [11] [3] [10] % [5] %[12] %[6] % [13]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started