Question

Your company's summarized financial information for the beginning and projected end of the current year is as follows: Beginning of the Year End of the Year (projected) Assets $90,000 $100,000 Liabilities 30,000 30,000 Equity 160,000 70,000 Net Income 15,000 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. 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 Issue If Bonds are Issued 2 ROA= 3 ROE= 4 Debt Ratio= 5 D/E 7 Dividends=

Answer 1

		WITHOUT BOND ISSUE
		ROA=Net Income/Average total assets
	A	Net Income	$15,000
	B	Assets at the beginning of the year	$90,000
	C	Assets at the end of the year	$100,000
	D=(B+C)/2	Average asset	$95,000
	E=A/D	Return on Assets(ROA)	0.157894737
		Return on Assets(ROA)	15.79%
		ROE=Net Income /Average Shareholders Equity
	F	Shareholders Equity at the Beginning of the year	$60,000
	G	Shareholders Equity at the End of the year	$70,000
	H=(F+G)/2	Average Shareholders Equity	$65,000
	I=A/H	Return on Equity (ROE)	0.230769231
		Return on Equity (ROE)	23.08%
		Debt Ratio=Total Liabilities/Total Assets
	J	Total Liabilities	$30,000
	K	Total assets	$100,000
	L=J/K	Debt Ratio	0.3
		Debt Equity Ratio (D/E)=Total Liabilities/Shareholders Equity
	M	Shareholders Equity	$70,000
	N=J/M	Debt Equity Ratio(D/E)	0.428571429
		Increase in Equity=70000-60000	$10,000
		Net Income	$15,000
		Dividend =15000-10000	$5,000
		IF BONDS ARE ISSUE
		Amount Received from Bond Issue	$37,015.12
		End of Year Assets =100000+37015.12	$137,015.12
		End of Year Liabilities=30000+37015.12	$67,015.12
		End of year Equity	$70,000
		ROA=Net Income/Average total assets
	A	Net Income	$15,000
	B	Assets at the beginning of the year	$90,000
	C	Assets at the end of the year	$137,015.12
	D=(B+C)/2	Average asset	$113,507.56
	E=A/D	Return on Assets(ROA)	0.132149788
		Return on Assets(ROA)	13.21%
		ROE=Net Income /Average Shareholders Equity
	F	Shareholders Equity at the Beginning of the year	$60,000
	G	Shareholders Equity at the End of the year	$70,000
	H=(F+G)/2	Average Shareholders Equity	$65,000
	I=A/H	Return on Equity (ROE)	0.230769231
		Return on Equity (ROE)	23.08%
		Debt Ratio=Total Liabilities/Total Assets
	J	Total Liabilities	$67,015
	K	Total assets	$137,015
	L=J/K	Debt Ratio	0.48910748
		Debt Equity Ratio (D/E)=Total Liabilities/Shareholders Equity
	M	Shareholders Equity	$70,000
	N=J/M	Debt Equity Ratio(D/E)	0.957358857
				Without Bond Issue	If Bonds are issued
			ROA	15.79%	13.21%
			ROE	23.08%	23.08%
			Debt Ratio	0.3	0.49
			D/E	0.43	0.96
			Dividend	$5,000