High Sky Inc. a hot-air balloon manufacturing firm, currently has the following simplified balance sheet: Assets Total assets $1,200,000 --------------------------------- Liablilities & Capital Bonds (10% interest) $700,000 Common stock at par ($2), 150,000 shares $300,000outstanding Contributed capital in excess of par $150,000 Retained earnings $50,000 Total liabilities and capital $1,200,000 ----------------------------------- The company is planning an expansion that is expected to cost $300,000. The expansion can be financed with new equity (sold to net the company $3 per share) or with the sale of new bonds at an interest rate of 12 percent. (The firm’s marginal tax rate is 40%.) Compute the indifference point between the two financing alternatives. Round your answer to nearest dollar.
High Sky Inc. a hot-air balloon manufacturing firm, currently has the following simplified
Assets
Total assets $1,200,000
---------------------------------
Liablilities & Capital
Bonds (10% interest) $700,000
Common stock at par ($2), 150,000 shares $300,000outstanding
Contributed capital in excess of par $150,000
Total liabilities and capital $1,200,000
-----------------------------------
The company is planning an expansion that is expected to cost $300,000. The expansion can be financed with new equity (sold to net the company $3 per share) or with the sale of new bonds at an interest rate of 12 percent. (The firm’s marginal tax rate is 40%.)
Compute the indifference point between the two financing alternatives. Round your answer to nearest dollar.
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 12 images
