Problem #1
Question One: When income before interest and taxes is $800,000
Plan 1
Plan 2
Plan 3
Income before bond interest and income tax
800,000
800,000
800,000
Bond interest
0
0
300000
Balance
800,000
800,000
500,000
Income tax
200000
200000
125000
Net income
600,000
600,000
375,000
Dividends on preferred stock
0
200000
0
Earnings available for common stock
600,000
580,000
375,000
Number of common shares
400,000
200,000
100,000
Earnings per share in common stock
1.5
2.9
2.0
3.75
Round up
Question Two: When income before interest and taxes is $450,000
Plan 1
Plan 2
Plan 3
Income before bond interest and income tax
450,000
450,000
450,000
Bond interest
0
0
300000
Balance
450,000
450,000
150,000
Income tax
112500
112500
37500
Net income
337,500
337,500
112,500
Dividends on preferred stock
0
200000
0
Earnings available for common stock
337,500
317,500
137500
112,500
Number of common shares
400,000
200,000
100,000
Earnings per share in common stock
0.84375
.08
1.5875
.07
1.125
.11
Advantages and Disadvantages of each plan
Plan 1
One of the key advantages of plan 1 is the expected higher returns. Besides, this plan offers a better chance of protection of wealth in the event of inflation. Besides these advantages, this plan is associated with a number of disadvantages. While this plan can promise high returns, it can also lead to huge losses for the holder. How and why? Besides, the holder does not have much control over the investment. Any payments required?
Plan 2
In addition to creating an opportunity for better returns, Plan 2 also offers protection of wealth similar to plan 1. Besides, this plan offers an option for the investors to convert the preferred stocks into common stocks. The plan also offers priority access to the assets. On the other hand, the plan is highly risky. The preferred stock in this plan is highly sensitive to interest rates. The preferred stock also presents no voting rights. Does it vary much? Require payments?
Plan 3
The third plan offers an option for both stocks and bonds. Compared to plan 1 and plan 2, plan 3 may be less volatile and less risky especially with the selection of the bonds. However, this plan may be risky to the interest rates. Ideally, bonds tend to fall or rise with respect to interest rates. Is the investment the same as the other 2?
Problem #2
Question One
Working Capital
Total current assets = 80,000+235,000+190,000+160,000+10,000= 675,000
Total current liabilities = 158,000+80,000+12,000= 260,000
Working capital = 425,000
Current Ratio
Current ratio = 2.6 I came up with 2.7 – what you have for assets and liabilities? I have 250000 for liabilities
Quick Ratio
Quick ratio=1.9
Question Two
Sold temporary investment at no gain or loss, $35,000.
Working Capital
should this be 425000?
Current Ratio
Quick Ratio
Paid accounts payable, $40,000.
Working capital
should this be 425000?
Current ratio
Quick Ratio
Purchased goods on account, $75,000.
Working capital
425000
Current ratio
Quick Ratio
Paid notes payable, $30,000.
Working capital
425000
Current ratio
Quick Ratio
Declared a cash dividend, $15,000.
Working capital
Current ratio
Quick Ratio
Declared a common stock dividend on the common stock, $32,000.
Working capital
425000
Current ratio
Quick Ratio
Borrowed cash on a long-term note, $150,000.
Working capital
575000
Current ratio
Quick Ratio
Received cash on account, $ 175,000.
Working capital
425000
Current ratio
Quick Ratio
Paid cash prepaid expenses, $10,000.
Working capital
425000
Current ratio
Quick Ratio
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