Chapter 15 Solutions

Chapter 15 Solutions - Chapter 15: LongTerm Financing: An...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 15: Long–Term Financing: An Introduction 15.2 Assuming that 100 shares are repurchased at $46 per share and cancelled: Before the purchase After the purchase Common shares 2,500,000@1.6$/share $4,000,000 Common shares 2’499’900@1.6$/share $3,999,840 Retained earnings $195,000,000 Retained earnings $194,995,560 Total $199,000,000 Total $198,995,400 Alternatively, if the shares are not cancelled and remain as Treasury Stock, the accounts would be as follows: After the purchase Common shares 2,500,000@1.6$/share $4,000,000 Treasury Stock (4,600) Retained earnings $195,000,000 Total $198,995,400 15.4 The following table summarizes the main difference between debt and equity. Debt Equity Repayment is an obligation of the firm Yes No Grants ownership of the firm No Yes Provides a tax shield Yes No Liquidation will result if not paid Yes No When corporations try to create a debt security that is really equity, they are trying to obtain the tax benefits of debt while eliminating its bankruptcy costs. Preferred stock is like an “equity bond” because: 1. Preferred holders receive a stated dividend.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Chapter 15 Solutions - Chapter 15: LongTerm Financing: An...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online