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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Leverage

Cook Corporation issued financial statements at December 31, 2019, that include the following information:

Balance sheet at December 31,2019

Assets $8,000,000

Liabilities $1,200,000

Stockholders' equity (300,000 shares) $6,800,000

Income statement for 2019:

Income from operations $1,200,000

Less: Interest expense (100,000)

Income before taxes $1,100,000

Less: Income taxes expense (0,30) (330,000)

Net income $ 770,000

The levels of assets, liabilities, stockholders' equity, and operating income have been stable in recent years; however, Cook Corporation is planning a 51,800,000 expansion program that will increase income from operations by $350,000 to $1,550,000, Cook is planning to sell 8.5% notes at par to finance the expansion.

Required:

2. What earnings per share will Cook report if the proposed expansion is undertaken? Would this use of leverage be advantageous to Cook’s stockholders? Explain.

To determine

Concept introduction:

Basic Earnings per share:

The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:

Basic Earnings per share=Net Income - Preferred DividendWeighted Average Common Shares Outstanding

 Net Income available to common stockholder = Net income  Preferred Dividend

To calculate:

The Earnings per share after expansion.

Explanation

The Earnings per share after expansion is calculated as follows:

Income from Operation (A) $ 1,550,000
Less: Interest Expense (B) 100000+(1800000*8.5%) $ 253,000
Income before tax (C) = (A-B) $ 1,297,...

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