Question

Check my work 1 No-Toxic-Toys currently has $410,000 of equity and is planning an $164,000 expansion to meet increasing demand for its product. The company currently earns $61,500 in net income, and the expansion will yield $30,750 in additional income before any interest expense. 0.37 points The company has three options: (1) do not expand, (2) expand and issue $164,000 in debt that requires payments of 11% annual interest, or (3) expand and raise $164,000 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.) eBook 1 2 3 Print Don't Expand Debt Financing Equity Financing References Income before interest expense Interest expense Net income Equity Return on equity 25.0: % % %

Answer 1

Solution Statement showing computation of return on Equity on different options Particulars Don't expand Debt financing Equity Financing Income before interest expense (A) $ 61,500 $ 92,250 $ 92,250 Interest expense ($164,000 X 11%) (B) $ $ 18,040 $ Net Income (C=A-B) $ 61,500 $ 74,210 92,250 Equity (D) $ 410,000 $ 410,000 $ 574,000 Return on Equity (C/D) 15.00% 18.10% 16.07% Conclusion Hence the compnay must choose debt financing option in order to attain higher return on equity