When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par. To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

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Answer 1

Question

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.

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Answer 2

Question

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.

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Answer 3

Question

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.

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Answer 4

Question

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.

Answer 6

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

Answer 7

Chapter 10, Problem 7BTN

1.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: By using Return on Equity compute the expansion if interest on the $100,000 note.

Answer 8

1.

Expert Solution

Answer to Problem 7BTN

Company B issued $100,000 note with an interest rate of 10% as it yields the highest return on equity.

Answer 9

1.

Expert Solution

Answer 10

1.

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Computation of net income of the company when it issues 10% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$20,000Net income = $36,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$36,000$250,000ROE=14.4%

Computation of net income before interest expenses after issuance of $100,000 note:

Net income before interest expenses= ( Current net income before interest expenses+ Additional income)Net income before interest expenses=$40,000+$16,000Net income before interest expenses=$56,000

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×10%Interest expenses=$10,000

ii. Computation of total interest expenses after issuance of note: Total interest expenses= Interest expenses before issue of note +Interest expenses on noteTotal interest expenses=$10,000+$10,000Total interest expenses=$20,000

Computation of net income when it issues note with 15% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$25,000Net income = $31,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$31,000$250,000ROE=12.4%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×15%Interest expenses=$15,000

2. Computation of total interest expenses after issuance of note: Total interest expenses= ( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$15,000Total interest expenses=$25,000

Computation of net income of the company when it issues note with 16% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$26,000Net income = $30,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$30,000$250,000ROE=12%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×16%Interest expenses=$16,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$16,000Total interest expenses=$26,000

Computation of net income of the company when it issues note with 17% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$27,000Net income = $29,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$29,000$250,000ROE=11.6%

Working note:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×17%Interest expenses=$17,000

Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$17,000Total interest expenses=$27,000

Computation of net income of the company when it issues note with 20% interest rate:

Net income =Income before interest expenses-Interest expensesNet income = $56,000-$30,000Net income = $26,000

Computation of ROE $100,000 note:

ROE=Net income after interest expensesStockholder's equityROE=$26,000$250,000ROE=10.4%

Working note:

1. Computation of Interest expenses:

Interest expenses=Par value×Rate of interestInterest expenses=$100,000×20%Interest expenses=$20,000

2. Computation of total interest expenses after issuance of note: Total interest expenses=( Interest expenses before issue of note +Interest expenses on note)Total interest expenses=$10,000+$20,000Total interest expenses=$30,000

Answer 13

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.

Answer 14

2.

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: General rule the results above shows.

Answer 15

2.

Expert Solution

Answer to Problem 7BTN

In order to give the shareholders better return company must opt for debt with low interest rate.

Answer 16

2.

Expert Solution

Answer 17

2.

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

Cost of arranging funds and return on equity is used as an indicator of financial position and growth prospects of the company. Lower interest expense is implied by lower interest rate on debts funds and it results in more earnings for the shareholders and vice-versa. So, in order to give the shareholders better return, company must opt for debt with low interest rate.