Your companys summarized financial information for the begin

Your company\'s summarized financial information for the beginning and projected end of the current year is as follows inning of the Year sets abilities qui nd of the Year ( 100,000 0,000 0,000 t Income Your company is considering issuing 30 bonds at the end of the year (December 31st). The bonds will pay 8% interest semi-annually for 10 years and the market rate for similar bonds is 5%. Therefore, the total bond proceeds are $37,015.12. Calculate the following ratios with and without the bond issue 15,000 Review question: how much did the company pay in dividends this year (if any)? The company did not issue or repurchase any stock during the year Without Bond If Bonds are ssue Issued 2 ROA- 3 ROE 4 Debt Ratio 51DE- Dividends 8 10

Solution

Beginning RE – Ending RE + Net income (-loss) = Dividends paid. Dividend = $60000 - $70000 +$15000 $5,000.00 Without Bond Issue if bonds issued ROA = Net Income/ Average Assets ROA = $15000/(($90,000+$100,000)/2) 15.79% ROA = $12600/(($90,000+$100,000)/2) 13.26% ROE Ratio = Net Income/ Average Shareholder\'s Equity ROE = $15000/(($60,000 + $70,000)/2) 23.08% ROE = $12600/(($60,000 + $70,000)/2) 19.38% Debt Ratio = Debt/Total Assets Debt Ratio = $30,000/$100000 30.00% Debt Ratio = ($30,000 + $37015.12)/$100000 67.02% Debt Equity = Debt/Equity Debt Equity = $30,000/$70,000 42.86% Debt/Equity = ($30,000+$37015.12)/70000 95.74% Bonds Issued at Premium Adjusted Net Income after issuance of Bonds Net Income - Interest Expense - Amortisation of premium $15000 - ($925.38+918.51-274.62-281.49) $12,600 Period Interest Payment = 4% x face value Interest Expenses = 2.5% x previous Book value Amortization of Bonds Premium C-B Credit Balance in bonds Premium Account Credit Bal in Bonds Payable Book Value of Bonds F+ E 0 $7,015.12 $30,000 $37,015.12 1 $1,200 $925.38 -$274.62 $6,740.5 $30,000 $36,740.5 2 $1,200 $918.51 -$281.49 $6,459.01 $30,000 $36,459.01 3 $1,200 $911.48 -$288.52 $6,170.49 $30,000 $36,170.49 4 $1,200 $904.26 -$295.74 $5,874.75 $30,000 $35,874.75 5 $1,200 $896.87 -$303.13 $5,571.62 $30,000 $35,571.62 6 $1,200 $889.29 -$310.71 $5,260.91 $30,000 $35,260.91 7 $1,200 $881.52 -$318.48 $4,942.43 $30,000 $34,942.43 8 $1,200 $873.56 -$326.44 $4,615.99 $30,000 $34,615.99 9 $1,200 $865.4 -$334.6 $4,281.39 $30,000 $34,281.39 10 $1,200 $857.03 -$342.97 $3,938.42 $30,000 $33,938.42 11 $1,200 $848.46 -$351.54 $3,586.89 $30,000 $33,586.89 12 $1,200 $839.67 -$360.33 $3,226.56 $30,000 $33,226.56 13 $1,200 $830.66 -$369.34 $2,857.22 $30,000 $32,857.22 14 $1,200 $821.43 -$378.57 $2,478.65 $30,000 $32,478.65 15 $1,200 $811.97 -$388.03 $2,090.62 $30,000 $32,090.62 16 $1,200 $802.27 -$397.73 $1,692.88 $30,000 $31,692.88 17 $1,200 $792.32 -$407.68 $1,285.21 $30,000 $31,285.21 18 $1,200 $782.13 -$417.87 $867.34 $30,000 $30,867.34 19 $1,200 $771.68 -$428.32 $439.02 $30,000 $30,439.02 20 $1,200 $760.98 -$439.02 -$0 $30,000 $30,000