a. What impact would the new capital structure have on the firm's net income, totál dollar return to investors, and ROE? b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a.
a. What impact would the new capital structure have on the firm's net income, totál dollar return to investors, and ROE? b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in Part a.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
pm.1
Transcribed Image Text:Seattle Health Plans currently uses zero debt financing. Its operating income
it pays taxes at a 30 percent rate. It has $5 million in assets and, because it is all-equity financed,
$5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt
financing bearing an interest rate of 8 percent.
a. What impact would the new capital structure have on the firm's net income, totál dollar return to
investors, and ROE?
b. Repeat the analysis, but now assume that Seattle Health Plans is a not-for-profit
corporation and hence pays no taxes. Compare the results with those obtained in Part a.
ANSWER
a.
7
B
9
,
1
2
3
4
Balance Sheet
Total assets
Debt
Common stock
Total liabilities and equity
Income Statement
EBIT
Interest expense
Taxable income
Taxes (30%)
Net income
Total dollar return to investors
ROE
5 b.
Stock
Stock/Debt
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