Sources of Capital: Owner's Equity

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Owner’s Equity as a Source of Capital

Sources of capital come in two forms: debt and equity. Obtaining permanent capital through equity is the capital supplied by the entity’s owners. It is the owner’s share in the financing of all the assets. Richard Scott, United States accounting professor wrote, “one of the most deep-seated, and incontrovertible concepts embraced by accounting theory today is that of owner’s equity.” Through analysis of the case, we found this to be true. There are different financing costs both a company and its investors face when considering equity financing. It is strangely fascinating that often times, equity financing becomes more costly than debt financing. The analysis of opportunity for both sides of
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The three income assumptions provide higher returns at a more constant rate than the other proposals. For Innovative Engineering Company, proposals A and B are more ideal for meeting their control needs. For a further analysis of earnings, the pre-tax earnings and return on investment are calculated as follows:

Pre-Tax = 100,000 / (1-.34) = 151,515.15 Proposal A:
Debt = $1,100,000
Common Stock = $100,000
Interest = $88,000
Dividend = $21,200
Pre-Tax Earnings = $109,200 (sum – common stock and debt)
Return on Investment = 9% (pre-tax earnings / $1,200,000)

Proposal B:
Debt = $200,000
Preferred Stock = $900,000
Common Stock = $100,000
Interest = $16,000
Preferred Dividend = $90,000
Common Dividend = $10,000
Pre-Tax Earnings = -$64,000
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