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- If a business firm has assets worth $170,000 and liabilities that total $40,000 what is the value of the owner's equity? Show you work for full credit.If the Equity of NRWM, Inc. is $17,000,000; and the company owes $2,000,000 in unpaid payroll and owes $8,000,000 to the bank on a credit line, what is the FAIR MARKET VALUE of the assets it owns?At this point, you may be confused why calling part of your in- vestment debt or equity makes a difference. Let’s walk through an example and compute your post-tax returns. Suppose $2 million of your investment is structured as debt and the remaining $8 million is equity. What happens each year after the company is set up? Well, using the $4 million EBIT, the company will first pay $2 million 50% = $1 million interest to you (as a debt investor). Then, on the remaining $4 $1 = $3 million of EBIT, the company pays corporate taxes of $3 20% = $0.6 million and is left with $2.4 million, which will be paid out to you (the equity holder) as dividend. Income Statement EBIT 4 -Interest expense 1 -Corporate taxes .6 = Net income of 2.4 million Therefore, the total returns to you (as an investor) is $1 million in interest and $2.4 million in dividends, which is a total of $3.4 million.4 Uncle Sam collected $0.6 million. The company will go bankrupt if its EBIT is strictly less than interest…
- 1. (a) An organization has $2 million in assets and an earnings beforeinterest and taxes (EBIT) profit of $500,000. The interest rate is 12%and the tax rate is 35%. It has financed its assets with no debt. Whatis its after interest and taxes profit? What is the ROE?Profit__________________ROE___________________(b) If the same organization in 1(a) now finances assets with 40%debt, what is the new after taxes and interest profit and the newROE?Profit __________________ROE____________________A company needs to raise $9 million and issues bonds for that amount rather than additional capital stock. Which of the following is not a likely reason the company chose debt financing? A. Management hopes to increase profits by using financial leveraging. B. The cost of borrowing is reduced because interest expense is tax deductible. C. Adding new owners increases the possibility of bankruptcy if economic conditions get worse. D. If money becomes available, the company can rid itself of debts.The Dinmore Company has total assets of $6.4 million, currentassets of $2.3 million, current liabilities of $2.5 million andtotal liabilities of $4.2 million.1.What is the amount of the stockholders’ equity?2.What is the amount of the net working capital?3.What is the amount of the long term assets?4.What is the amount of the long term debt?Answers on
- The Moore Corporation has operating income (EBIT) of 750,000. The companys depreciation expense is 200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the companys net income? What is its net cash flow?Southwestern Wear Inc. has the following balance sheet: The trustees costs total 281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of 2.5 million is received from sale of the assets?You are about to buy a business that is worth $200,000, but you do not have enough money to purchase the business entirely. You have a total of $90,000 in savings and you are looking at different financing options. Provide information for the following: Explain the advantages of equity financing and debt financing Explain the disadvantages of equity financing and debt financing Provide an example of equity financing Provide an example of debt financing Explain which type of long-term liability financing you would choose to buy the business? Provide a suggestion for future business owners on financing
- You own a business with Assets on the books valued at $200,000. These assets were financed with Debt (30%) and Equity (70%). If the cost of debt capital was 4% and the cost of equity capital was 15%, then what was the WACC of the firm?You are about to buy a business that is worth $200,000, but you do not have enough money to purchase the business entirely. You have a total of $90,000 in savings and you are looking at different financing options. Provide information for the following: Explain the advantages of equity financing and debt financing Explain the disadvantages of equity financing and debt financing Provide an example of equity financing Provide an example of debt financing Explain which type of long-term liability financing you would choose to buy the business?Azure Mapping Solutions, Inc., is an advisory corporation owned by outside investors with $9 million in annual gross receipts. It should use: a. the accrual basis of accounting because it has no inventory. b. the cash basis of accounting because it is an advisory corporation. c. the cash basis of accounting because its annual gross receipts exceed $5 million. d. the accrual basis of accounting because its annual gross receipts exceed $5 million.