Can you explain this strategy in year 9 2 paragraphs 2 we to

Can you explain this strategy in year 9 (2 paragraphs) 2 we took 50,000!oan @4.5% interest to pay off 50,000 loan at 8.5 % this is to reduce our interest liability and improve our balance sheet Loans and buying back stock 1. 9 8 2. Notes to Income Statement Income Statement ($000) AC Camera Revenues UAV Drone Revenues Africa Pacific 62,800 302,752 Revenues listed here have been ad- 323,515 justed for promotional discounts and exchange rates. See the Market Seg- 73,933 93,121196,912 128,550 2,969 4 01,869 91,252122 9796 107,684626,267 ment Performance reports for detals Total Revenues Cost of Goods Sold 65.633 318.316 on promotional discount and ex- change rate adjustments to revenues. 62,791 17,530 35,865 81,017108,875 35,862 75,530 3,288 9,085 Other Income (Expense) will include 0,091 charitable contributions instructor- imposed fines (appearing as nega- 22,300 23,300 Marketing Costs Administrative Expenses 3,099 |- Operating Profit (Loss) 86,468 -7,603 tive), and instructor-awarded (appearing as positive) Interest Income (Expense) Year 9 $4.80 $5.02 $0.00 $3.00 in \'The incorme tax rate is 30%. If a net loss was recorded in Year 8, the loss 78,679s carried forward and may offset Profitability and PayoutYear 8 Earnings Per Share Dividends Per Share Pre-Tax Profit (Loss) Income Taxes 53.604 some or all taxable Year 9 25,075 Year 9 : | reduce the company\'s tax - Net Profit (Loss)

Solution

1) The decision to retire an existing loan of 50,000 having an effective interest rate of 8.50% was done as a cheaper loan of same amount that is 50,000 with an effective interest rate of 4.50% was available.

Since the interest rate on the newer loan was lower, the interest expense on a year to year basis would be lower thus aiding profitability and helping strengthening the balance sheet through addition in retained earnings.

2) Taking a loan and buying back stock is done to reduce the number of outstanding shares. Thus if the effect of taking the loan and increased interest expense is not much, then we can till manage reasonable profit. And due to lesser amount of stock / equity, the return on equity goes up. Thus taking a loan and buying back shares is a technique to increase the Return on Equity.