You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the sameprospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debtfinancing.ScenarioBad yearNormal yearGood yearTotal assetsTax rateDebtEquityBorrowing rateSalesInterest expense for Debt FreeInterest expense for Debt Spree$200$275$380Debt Free$ 25021%EBIT$12$ 34$ 51$0$ 25016%Required:a. Calculate the interest expense for each firm:Debt Spree$ 25021%$150$ 10016% Required:a. Calculate the interest expense for each firm:Interest expense for Debt FreeInterest expense for Debt Spreeb. Calculate the following items for each firm for each scenario (bad year, normal year, good year): return on assets (ROA), net profit,and return on equity (ROE). (Use a minus sign to indicate negative answers. Round your answers to 2 decimal places.)ScenarioBad yearNormal yearGood yearROA%%%Debt FreeNet ProfitROE%%%ROA%%%Debt SpreeNet ProfitROE%%%

Interest expense = Debt * Borrowing rateROA = Net profit / Total assetsNet profit = EBIT * (1 - Tax…

Answered: You have the following information…

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter5: Evaluating Operating And Financial Performance

Section: Chapter Questions

Problem 4EP

See similar textbooks

Similar questions

Assume you are given the following relationships for the Haslam Corporation: Calculate Haslam’s profit margin and liabilities-to-assets ratio. Suppose half its liabilities are in the form of debt. Calculate the debt-to-assets ratio.
Which of the following liabilities should always be included in the debt calculations for a firm? a. accounts payableb. commercial paperc. deferred revenued. deferred tax liabilities
If two companies have exact same PBIT but one of them has some debt finance, would they pay same of amount of tax? Please demonstrate with Income Statement Extract. You can use numbers of your choice
Which of the following statements is CORRECT? A. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased B. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. C. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. D. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
A firm had the following values for the four debt ratios discussed in the chapter: Liabilities to Assets Ratio: less than 1.0 Liabilities to Shareholders Equity Ratio: equal to 1.0 Long-Term Debt to Long-Term Capital Ratio: less than 1.0 Long-Term Debt to Shareholders Equity Ratio: less than 1.0 a. Indicate whether each of the following independent transactions increases, decreases, or has no effect on each of the four debt ratios. (1) The firm issued long-term debt for cash. (2) The firm issued short-term debt and used the cash proceeds to redeem long-term debt (treat as a unified transaction). (3) The firm redeemed short-term debt with cash. (4) The firm issued long-term debt and used the cash proceeds to repurchase shares of its common stock (treat as a unified transaction). b. The text states that analysts need not compute all four debt ratios each year because the debt ratios are highly correlated. Does your analysis in Requirement a support this statement? Explain.
You are considering two possible companies for investment purposes. The following data is available for each company. Additional Information: Company A: Bad debt estimation percentage using the income statement method is 6%, and the balance sheet method is 10%. The $230,000 in Other Expenses includes all company expenses except Bad Debt Expense. Company B: Bad debt estimation percentage using the income statement method is 6.5%, and the balance sheet method is 8%. The $140,000 in Other Expenses includes all company expenses except Bad Debt Expense. A. Compute the number of days sales in receivables ratio for each company for 2019 and interpret the results (round answers to nearest whole number). B. If Company A changed from the income statement method to the balance sheet method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations). C. If Company B changed from the balance sheet method to the income statement method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations). D. What benefits do each company gain by changing their method of bad debt estimation? E. Which company would you invest in and why? Provide supporting details.
What do the following data, taken from a comparative balance sheet, indicate about the companys ability to borrow additional long-term debt in the current year as compared to the preceding year?
Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 1.7 Return on assets (ROA) 4% Return on equity (ROE) 6% Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin: % Liabilities-to-assets ratio: % Suppose half of its liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. %
Complete the following tasks: a. Consider the following worksheet with information extracted from a financial statement: 2018 Assets Liabilities Equity Reported ($) 500 000 100 000 400 000 An analyst makes an adjustment that decreases goodwill by $100 000 and equity (profit) by $100 000. This goodwill was acquired on consolidation, hence there are no tax adjustments. Using the worksheet approach, what would be the change in the debt to assets ratio? b. Consider the following information: Net working capital/total assets = 0.9 Retained earnings/total earnings = 0.15 EBIT/total assets = 1.1 MV of equity/BV of total liabilities = 2 Sales/total assets = 2.5 Compute the Z-score. Is there a likelihood of financial distress?
Briefly describe the ratios that can be used to evaluate a company’s ability to pay long-term debt.
1. Assuming that the company’s business model has an objective of holding the debt securities to collect contractual cash flows, what is the realized gain on sale of the Yankee bonds in 2021? 2. Assuming that the company's business model has an objective of holding debt securitiees to collect contractual cash flows, what is the total unrealized holding gain/loss to be reported in the profit/loss for 2021?
An inexperienced accountant for Bramble Corp. showed the following in the income statement: net income $217,260 and unrealized gain on available-for-sale securities (before taxes) $91,900. The unrealized gain on available-for-sale securities is subject to a 29% tax rate.Prepare a correct statement of comprehensive income. BRAMBLE CORP.Partial Statement of Comprehensive Income select a comprehensive income item enter a dollar amount select an opening section name select a comprehensive income item enter a dollar amount select an closing name for this statement $enter a total amount for this statement

SEE MORE QUESTIONS

Recommended textbooks for you

Entrepreneurial Finance

Finance

ISBN:

9781337635653

Author:

Leach

Publisher:

Cengage

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

SWFT Essntl Tax Individ/Bus Entities 2020

Accounting

ISBN:

9780357391266

Author:

Nellen

Publisher:

Cengage

Entrepreneurial Finance

Finance

ISBN:

9781337635653

Author:

Leach

Publisher:

Cengage

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

SWFT Essntl Tax Individ/Bus Entities 2020

Accounting

ISBN:

9780357391266

Author:

Nellen

Publisher:

Cengage

Financial Reporting, Financial Statement Analysis…

Finance

ISBN:

9781285190907

Author:

James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:

Cengage Learning

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

SEE MORE TEXTBOOKS