Assignment – Exploring Financing options
Question # 00439252
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Updated on: 12/08/2016 11:28 PM Due on: 12/09/2016
Assignment – Exploring Financing options
- John Brown owns a business and wants to expand. He can either borrow money or sell additional equity. Currently he is the sole owner of the business. Complete the information below for two scenarios: Scenario A the company borrows $200,000 and Scenario B, the company sells an additional $200,000 in common stock at $1 per share. What would you advise John to do and why? Assume for this example that revenues and expenses (other than those related to debt) do not change.
Abbreviated Balance Sheet Information | |||
Currently | Scenario A | Scenario B | |
Liabilities | |||
Debt | $75,000 | ||
Stockholder’s Equity | |||
Common Stock (currently 200,000 shares/ $1 each) | $200,000 | ||
Retained Earnings | $ 50,000 | ||
Total Equity | $250,000 | ||
Abbreviated Income Statement | |||
Revenues | $125,000 | ||
Expenses (not including interest and taxes) | 60,000 | ||
Inc. before interest and taxes | 65,000 | ||
Interest expense (at 3% on debt amt. above) | 2,250 | ||
PreTax Income | 62,750 | ||
Taxes (rate of 25%) | 15,687.50 | ||
Net Income | $ 47,062.50 | ||
ROE | .188 | ||
Debt to Equity Ratio | .30 |
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Rating:
/5
Solution: Assignment – Exploring Financing options