The question number 1 I already aswered, please send me just the 2 question. Mack Company, HappyDay’s branch, plans to invest $50,000 in land that will produce annual rent revenue equal to 15 percent of the investment, starting on January 1, Year 3. The revenue will be collected in cash at the end of each year, starting December 31, Year 3. Mack can obtain the cash necessary to purchase the land from two sources. Funds can be obtained by issuing $50,000 of 10 percent, five-year bonds at their face amount. Interest due on the bonds is payable on December 31 of each year with the first payment due on December 31, 2021. Alternatively, the $50,000 needed to invest in land can be obtained from equity financing. In this case, the stockholders (holders of the equity) will be paid a $5,000 annual cash dividend. Mack Company is in a 30 percent income tax bracket. 1. Prepare an income statement and statement of cash flows for Mack Company for Year 3 under the two alternative financing proposals (debt financing and equity financing) Mack Company Income Statements Year 3 DEBIT FINANCINGEQUITY FINANCING Rental Revenue $ 7,500.00 $ 7,500.00 Interest expense $ (5,000.00) Earning before int and taxes $ 2,500.00 less taxes 30% $ (750.00) $ (2,250.00) Earning after Int and taxes $ 1,750.00 $ 5,250.00 Net Earnings $ 1,750.00 $ 5,250.00 Investiment $ 50,000.00 Annual rental value %15% Annual rental value $ 7,500.00 Debt $ 50,000.00 Cost of debt10% Statements of Cash Flows Operating Activities Gross Cash flow $ 7,500.00 $ 7,500.00 Expenses paid interest $ (5,000.00) Taxes expense $ (750.00) $ (2,250.00) Net Cash flow Oper Act $ 1,750.00 $ 5,250.00 Investing Activities Financing Activities Loan $ 50,000.00 Equity issued $ 50,000.00 Payment dividend $ (5,000.00) Net Cash flow from Fin Act $ 50,000.00 $ 45,000.00 Net Change in Cash $ 51,750.00 $ 50,250.00 Add cash balance Ending cash balance $ 51,750.00 $ 50,250.00 2. Write a short memorandum explaining why one financing alternative provides more net income but less cash flow than the other.

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Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter9: Current Liabilities, Contingencies, And The Time Value Of Money

Section: Chapter Questions

Problem 9.21MCE

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The question number 1 I already aswered, please send me just the 2 question.

Mack Company, HappyDay’s branch, plans to invest $50,000 in land that will
produce annual rent revenue equal to 15 percent of the investment, starting
on January 1, Year 3. The revenue will be collected in cash at the end of each year,
starting December 31, Year 3. Mack can obtain the cash necessary to purchase the
land from two sources. Funds can be obtained by issuing $50,000 of 10 percent,
five-year bonds at their face amount. Interest due on the bonds is payable on
December 31 of each year with the first payment due on December 31, 2021.
Alternatively, the $50,000 needed to invest in land can be obtained from equity
financing. In this case, the stockholders (holders of the equity) will be paid a $5,000
annual cash dividend. Mack Company is in a 30 percent income tax bracket.

1. Prepare an income statement and statement of cash flows for Mack Company
for Year 3 under the two alternative financing proposals (debt financing and equity financing)

Mack Company
Income Statements Year 3
		DEBIT FINANCING	EQUITY FINANCING
Rental Revenue	$ 7,500.00	$ 7,500.00
Interest expense	$ (5,000.00)
Earning before int and taxes	$ 2,500.00
less taxes 30%	$ (750.00)	$ (2,250.00)
Earning after Int and taxes	$ 1,750.00	$ 5,250.00

Net Earnings	$ 1,750.00	$ 5,250.00

Investiment	$ 50,000.00
Annual rental value %	15%
Annual rental value	$ 7,500.00

Debt	$ 50,000.00
Cost of debt	10%
Statements of Cash Flows
Operating Activities
Gross Cash flow	$ 7,500.00	$ 7,500.00
Expenses paid interest	$ (5,000.00)
Taxes expense	$ (750.00)	$ (2,250.00)

Net Cash flow Oper Act	$ 1,750.00	$ 5,250.00
Investing Activities

Financing Activities
Loan	$ 50,000.00
Equity issued		$ 50,000.00
Payment dividend		$ (5,000.00)
Net Cash flow from Fin Act	$ 50,000.00	$ 45,000.00
Net Change in Cash	$ 51,750.00	$ 50,250.00
Add cash balance
Ending cash balance	$ 51,750.00	$ 50,250.00



2. Write a short memorandum explaining why one financing alternative
provides more net income but less cash flow than the other.

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