You are about to form a corporation that will need $500,000 to start operations. One option (the no-debt option) for the corporation is to raise the $500,000 by selling 50,000 common shares to you. Another option (the debt option) for the corporation would be to borrow $250,000 from you at 4% and to sell you 25,000 common shares for $250,000. You expect the corporation to earn income from operations this year of $80,000 and to incur income tax at a 30% rate. You also expect total assets to remain at $500,000 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.
Instructions
Complete the following information:

(a) Calculate the missing amounts for items [1] through [13].
(b) Explain why many of the ratio values you have calculated above are different with each financing option.

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No-Debt Option Debt Option $80,000 $80,000 ncome from operations Interest expense (496) Income before income tax Income tax expense (30%) Net income Average total assets Average common shareholders' equity Number of common shares Basic earnings per share Dividends declared Payout ratio Return on common shareholders' equity 0 [10] $500,00o$50o,000 $500,00o$250,000 25,000 131 50,000 [41 131 151 [10] [12] [131