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22nd Edition
ISBN: 9780077632878
Author: Wild
Publisher: MCG
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Chapter 16, Problem 7BTN
To determine

Introduction:

Cash flow: It is the cash inflow and/or cash outflow in a business. Any transaction or event that involves dealing in a cash in a business, comes under cash flow. If a cash goes out of the business, it is termed as a cash outflow and if a cash comes in the business, it is termed as a cash inflow. So, cash flow (=cash inflow- cash outflow) is the available cash for a business to use.

Net income: Net income is the total revenues less all expenses and costs, incurred. In other words, net income or profit of a business is calculated by deducting all expenses and costs from total revenues.

Sources of financing: It is the source of amounts to be invested in a business. For example, loan can be provided to invest in business. In this case, the source of financing is debt.

To explain:

  1. How cash flow can lag behind the net income.
  2. Potential sources of financing for its future expansion

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Morgan & Co. is currently an all-equity firm with 100,000 shares of stock outstanding at a market price of $30 per share. The company's earnings before interest and taxes are $120,000. Morgan & Co. has decided to add leverage to its financial operations by issuing $750,000 of debt at an 8% interest rate. This $750,000 will be used to repurchase shares of stock. You own 2,500 shares of Morgan & Co. stock. You also loan out funds at an 8% interest rate. How many of your shares of stock in Morgan & Co. must you sell to offset the leverage that the firm is assuming? Assume that you loan out all of the funds you receive from the sale of your stock.
Solve this financial accounting problem
Financial Accounting

Chapter 16 Solutions

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