70.2K

Verified Solution

Link Copied!

Your friend ir aho trying to understand if there's a benefit to borrowing money from the bank to finance the printing business; or would they be better off financing the busineis through shareholder's equity. They believe they can finance the entire $5,000,000 in assets they will fead by setting 500,000 shares to frends and family. Aternatively, the bank is witing to iend tbem 53,000,000 ot 8.0% interest with the fest coming from the sale of 200 , o00 shares to friends and family. The company faces a tax rate of 30N Obviousy there are four different ways your friend can put together their balance sheet. They cant (a) biy the expensive press and finance it entirely through shareholder's equity (b) buy the expensive press and finance if through a combination of debt and shareholder's equity (c) boy the less expensive press and finance it entirely through shureholder's equity (d) buy the less expensive press and finance it through a combination of debt and shareholderls equity Note: Whether they buy the more-expensive or less-expensive press, assume they will always need $5,000,000 in assets, If they buy the less xpensive press, they simply will have more money to invest in imventory.) \begin{tabular}{|c|c|c|c|c|c|} \hline & & Option 1 & Option 2 & Option 3 & Option 4 \\ \hline & Press option & Expenslve & Expenslive: & Cheap & Cheap \\ \hline & Financial plan & \begin{tabular}{l} Finance with only \\ Shareholeder Equity \end{tabular} & \begin{tabular}{c} Finance with Debt and \\ Shareholder Equity \end{tabular} & \begin{tabular}{c} Finance with only \\ Shareholeder Equily \end{tabular} & \begin{tabular}{l} Finance with Debt and \\ Shareholder tquily \end{tabular} \\ \hline \multicolumn{6}{|l|}{ Sales: } \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} Sales \\ Variable Cost \\ \end{tabular}} \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} Variable Cost \\ Contribution Margin \end{tabular}} \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} Contribution Margin \\ Fioed Cost \end{tabular}} \\ \hline \multicolumn{6}{|c|}{\begin{tabular}{l} Foxed Cost \\ Earnings Before Interest and Taxes \end{tabular}} \\ \hline \multicolumn{6}{|c|}{\begin{tabular}{l} Earnings Before Interest and Taxes \\ interest Expense \end{tabular}} \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} interest Expense \\ Earnings Before Tax \end{tabular}} \\ \hline \multicolumn{6}{|l|}{\begin{tabular}{l} Earnings Before Tax \\ Faxes \end{tabular}} \\ \hline Earnings After Tax & & & & & \\ \hline \end{tabular} \begin{tabular}{|r|r|r|r|} \hline Degree of operating leverage: & & \\ \hline Degree of financial leverage: & & \\ \hline Degree of combined leverage: & & \\ \hline & \\ \hline \end{tabular}

Answer & Explanation Solved by verified expert

See Answer