A new company requires $1 million of financing and is considering two arrangements as shown in the table below. Amount Amount of of debt Before-tax Arrangement equity raised $700,000 cost of debt financing $300,000 # 1 8% per annum # 2 $300,000 $700,000 10% per annum In the first year of operations, the company is expected to have sales revenues of $500,000, cost of sales of $200,000, and general and administrative expenses of $100,000. The tax rate is 30%, and there are no other items on the income statement. All earnings are paid out as dividends at year-end.
A new company requires $1 million of financing and is considering two arrangements as shown in the table below. Amount Amount of of debt Before-tax Arrangement equity raised $700,000 cost of debt financing $300,000 # 1 8% per annum # 2 $300,000 $700,000 10% per annum In the first year of operations, the company is expected to have sales revenues of $500,000, cost of sales of $200,000, and general and administrative expenses of $100,000. The tax rate is 30%, and there are no other items on the income statement. All earnings are paid out as dividends at year-end.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A new company requires $1 million of financing and is
considering two arrangements as shown in the table below.
Amount
Amount of
of debt
Before-tax
Arrangement equity raised
$700,000
cost of debt
financing
$300,000
# 1
8% per annum
# 2
$300,000
$700,000
10% per annum
In the first year of operations, the company is expected to have
sales revenues of $500,000, cost of sales of $200,000, and
general and administrative expenses of $100,000. The tax rate
is 30%, and there are no other items on the income statement.
All earnings are paid out as dividends at year-end.
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