Question

No-Toxic-Toys currently has $400,000 of equity and is planning an $160,000 expansion to meet increasing demand for its product. The company currently earns $100,000 in net income, and the expansion will yield $50,000 in additional income before any interest expense. The company has three options: () do not expand, (2) expand and issue $160,000 in debt that requires payments of 8% annual interest, or (3) expand and raise $160,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net Income Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.) 2 3 Don't Expand Debt Financing Equity Financing Income before interest expense Interest expense Net income Equity Return on equity

Answer 1

Solution:

	1	2	3
	Don't expand	Debt financing	Equity Financing
Income before Interest Expense	100000	150000	150000
Interest Expense ($160000*8%)	0	12800	0
Net Income	100000	137200	150000
Equity	400000	400000	560000
Return on Equity	25.0%	34.3%	26.8%