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Consequently the difference between the balance in

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Unformatted text preview: lities as of 12/31/12 + Face Value of Notes Payable – Discount Balance) Total Stockholders' Equity = Stockholders' Equity as of 12/31/12 + Net Income Debt/Equity Ratio = Total Debt ÷ Total Stockholders' Equity Debt/Equity (Note A) 12/31/13 12/31/14 12/31/15 e. 4.270 4.277 4.271 4.516 4.279 3.972 Debt/Equity (Note B) Debt/Equity (Note C) 4.418 4.278 4.086 Boyton must consider at least four factors in deciding which note to issue. First, the company must consider the income that can be earned from the proceeds. Since Note B provides the largest proceeds, this note provides the highest net income. Second, the company must consider the cash outflow effects of each note. If the company did not have sufficient cash on hand to meet an interest or principal payment, it could be forced into bankruptcy. Since each note requires a payment at maturity of $50,000, the only difference between the notes is the periodic interest payments. In this case, Note A requires the lowest interest payments. Third, the company must consider the immediate effects on its debt/equity ratio. If the company has any existing debt with a debt covenant that specifies a maximum debt/equity ratio, one of the notes may cause the company to violate the debt covenant. In this case, Note A results in the lowest debt/equity ratio in the current year. Finally, the company must consider the trend in the debt/equity ratio over time. If the company needs or desires to issue additional debt in the future, it might be constrained by its future debt/equity ratio. Creditors might be wary of a company with too high of a debt/equity ratio. In this case, the decrease in the debt/equity ratio is greatest for Note B. P11–6 a. The Amount of Interest Payments b. When the note payable was issued, the stated interest rate did not equal the effective interest rate; the effective interest rate exceeded the stated interest rate. Consequently, the proceeds from the note were less than face value, so that the entire loan to Rix Dr...
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