Financial Accounting
15th Edition
ISBN: 9781337272124
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 14, Problem 1PEA
To determine
Calculate earnings per share of common stock.
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As the chief financial officer of Adirondack Designs, you have the following information:
Next year’s expected net income after tax but before new financing
$ 51
million
Sinking-fund payments due next year on the existing debt
$ 26
million
Interest due next year on the existing debt
$ 21
million
Common stock price, per share
$ 33.5
Common shares outstanding
31
million
Company tax rate
35%
Calculate Adirondack’s times-interest-earned ratio for next year assuming the firm raises $61 million of new debt at an interest rate of 2 percent.
Calculate Adirondack’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million.
Calculate next year’s earnings per share assuming Adirondack raises the $61 million of new debt.
Calculate next year’s times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.6 million new shares at $22 a share instead of raising new debt.
Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-tax income of $768,000. Fill in the following table to calculate the weigted average percent cost of capital. (Round all decimals to four significant digits.)
Amount
Percent
After-Tax Cost
Weighted Cost
Mortgage bonds
$3,000,000
Unsecured bonds
2,500,000
Common stock
4,500,000
Total
What is the weighted average percent cost of capital?
What is the total cost of capital employed?
What is the EVA?
PQR Corporation is considering the following alternative plans of financing for raising$4,000,000:
The following additional information is available for PQR Corporation:
Earnings before bond interest and income taxes (EBIT) are $9,000,000.
The tax rate is 35%.
All bonds or stocks are issued at their par values.
Interest is payable at the end of each year.
Required:
Which plan should company choose & why (i.e. Explain the rationale behind selecting the plan)? Provide all the detailed calculations.
Chapter 14 Solutions
Financial Accounting
Ch. 14 - Describe the two distinct obligations incurred by...Ch. 14 - Explain the meaning of each of the following terms...Ch. 14 - If you asked your broker to buy you a 12% bond...Ch. 14 - A corporation issues 26,000,000 of 9% bonds to...Ch. 14 - If bonds issued by a corporation are sold at a...Ch. 14 - Prob. 6DQCh. 14 - Bonds Payable has a balance of 5,000,000, and...Ch. 14 - What is a mortgage note?Ch. 14 - Fleeson Company needs additional funds to purchase...Ch. 14 - In what section of the balance sheet would a bond...
Ch. 14 - Prob. 1PEACh. 14 - Brower Co. is considering the following...Ch. 14 - On January 1, the first day of the fiscal year, a...Ch. 14 - On January 1, the first day of the fiscal year, a...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - Prob. 4PEACh. 14 - Prob. 4PEBCh. 14 - On the first day of the fiscal year, a company...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - Prob. 6PEACh. 14 - Prob. 6PEBCh. 14 - A 1,500,000 bond issue on which there is an...Ch. 14 - Prob. 7PEBCh. 14 - On the first day of the fiscal year, a company...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - Berry Company reported the following on the...Ch. 14 - Averill Products Inc. reported the following on...Ch. 14 - Domanico Co., which produces and sells biking...Ch. 14 - Prob. 2ECh. 14 - Prob. 3ECh. 14 - Prob. 4ECh. 14 - Thomson Co. produces and distributes...Ch. 14 - On the first day of its fiscal year, Chin Company...Ch. 14 - Prob. 7ECh. 14 - Adele Corp., a wholesaler of music equipment,...Ch. 14 - Emil Corp. produces and sells wind-energy-driven...Ch. 14 - On the first day of the fiscal year, Shiller...Ch. 14 - On January 1, Year 1, Luzak Company issued a...Ch. 14 - On January 1, Year 1, Bryson Company obtained a...Ch. 14 - Prob. 13ECh. 14 - The following data were taken from recent annual...Ch. 14 - Loomis, Inc. reported the following on the...Ch. 14 - Prob. 16ECh. 14 - Tommy John is going to receive 1,000,000 in three...Ch. 14 - Prob. 18ECh. 14 - Prob. 19ECh. 14 - Prob. 20ECh. 14 - Prob. 21ECh. 14 - Prob. 22ECh. 14 - Prob. 23ECh. 14 - Prob. 24ECh. 14 - Prob. 25ECh. 14 - Boyd Co. produces and sells aviation equipment. On...Ch. 14 - Prob. 1PACh. 14 - On July 1, Year 1, Danzer Industries Inc. issued...Ch. 14 - Campbell Inc. produces and sells outdoor...Ch. 14 - The following transactions were completed by...Ch. 14 - On July 1, Year 1, Danzer Industries Inc. issued...Ch. 14 - Campbell, Inc. produces and sells outdoor...Ch. 14 - Prob. 1PBCh. 14 - On July 1, Year 1, Livingston Corporation, a...Ch. 14 - Rodgers Corporation produces and sells football...Ch. 14 - The following transactions were completed by...Ch. 14 - On July 1, Year 1, Livingston Corporation, a...Ch. 14 - Rodgers Corporation produces and sells football...Ch. 14 - CEG Capital Inc. is a large holding company that...Ch. 14 - Prob. 3CPCh. 14 - Prob. 4CPCh. 14 - Xentec Inc. has decided to expand its operations...Ch. 14 - You hold a 25% common stock interest in YouOwnIt,...Ch. 14 - The following financial data (in thousands) were...
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