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:
4. Suppose that income from operations will increase by $200,000 and that Cook could also raise the required $1,800,000 by issuing an additional 100.000 shares of common stock (assume the additional shares were outstanding for the entire year). Which means of financing would stockholders prefer? Explain.
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