Assignment(1)

Assignment(1) - common equity. For net income, the new...

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Operating income (4,500,000 * .13) Less: Interest (100,000 + 50,000) Earnings Before Taxes Less: Taxes (50%) Net Income Available to Common Again, if you have specific questions regarding this assignment, please let me know. For the week 1 assignment, I specifically sent back to each of you in your dropbox your original files with my comments included in either red or yellow highlights. I just wanted to briefly discuss the one area that seemed to be the greatest area of problems, although the problems varied from person to person. This is area C of Problem 4-10. In problem 4-10 you were asked to compute the return on equity after the renovation and then compare this to the rate pre-renovation. To compute return on common equity, the formula is net income available to common divided by common equity. Pre-renovation the calculation would be \$200,000 divided by \$1,000,000 or 20%. Post renovation, we first need to determine the new amount of net income and the new amount of
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Unformatted text preview: common equity. For net income, the new amount would be determined as follows: 585,000 150,000 435,000 217,500 217,500 The amount of equity after the renovation will be increase because the problem states the renovation will add 1,000,000 of property and equipment, and the debt ratio will remain at .50. This means the portion of debt to equity will continue to be 50/50. Therefore, half of the renovation will be financed by debt and half by equity, which is a 500,000 increase in both debt and equity. Therefore, after renovation the new equity will be 1,500,000. So the calculation of return on common equity post renovation will be 217,500 divided by 1,500,000, or 14.5%. Therefore, based on the information calculated on the return on assets pre and post renovation in part a & b, plus the calculation of return on common equity again pre and post renovation, you were to compare the rates and determine whether or not you would go forward with the renovation....
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This note was uploaded on 09/15/2011 for the course BUSINESS BUS 401 taught by Professor Dawnmckinley during the Fall '10 term at Ashford University.

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