P16-7 Multiple differences; calculate taxable income; balance sheet classification
Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:
Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.
Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):
Income Statement Tax Return Difference
2010 $20 $26 ($6)
2011 20 35 (15)
2012 20 12 8
2013 20 7 13
$80 $80 $0
4. Bad debt expense of $3 million is reported using the allowance method in 2011. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method): $2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2010.
5. In 2011, Sherrod accrued and expense and related liability for estimated paid future absences of $7 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million 2012; $3 million in 2013).
6. During 2010, accounting income included as estimated loss of $2 million from having accrued a loss contingency. The lost is paid in 2011 at which time it is tax deductible. Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2011, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.
Required:
1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.
2. What is the 2011 net income?
3. Show how deferred tax amounts should be classified and reported in the 2011 balance sheet.
Click here for the solution: Sherrod, Inc., reported pretax accounting income of $76 million for 2011
Showing posts with label Income. Show all posts
Showing posts with label Income. Show all posts
Thursday, January 14, 2016
Wednesday, October 14, 2015
Water Corporation reports $500,000 of taxable income for the current year
Water Corporation reports $500,000 of taxable income for the current year. The following additional information is available:
• For the current year, Water reports an $80,000 long-term capital loss and no capital gains.
• Taxable income includes $80,000 of dividends from a 10%-owned domestic corporation.
• Water paid fines and penalties of $6,000 that were not deducted in computing taxable income.
• In computing this year’s taxable income, Water deducted a $20,000 NOL carryover
from a prior tax year.
• Water claimed a $10,000 U.S. production activities deduction.
• Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.
Assume a 34% corporate tax rate. What is Water’s current E&P for this year?
Click here for the solution: Water Corporation reports $500,000 of taxable income for the current year
• For the current year, Water reports an $80,000 long-term capital loss and no capital gains.
• Taxable income includes $80,000 of dividends from a 10%-owned domestic corporation.
• Water paid fines and penalties of $6,000 that were not deducted in computing taxable income.
• In computing this year’s taxable income, Water deducted a $20,000 NOL carryover
from a prior tax year.
• Water claimed a $10,000 U.S. production activities deduction.
• Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.
Assume a 34% corporate tax rate. What is Water’s current E&P for this year?
Click here for the solution: Water Corporation reports $500,000 of taxable income for the current year
The following differences between financial and taxable income were reported by Dider Corporation for the current year
2. The following differences between financial and taxable income were reported by Dider Corporation for the current year.
(a) Excess of tax depreciation over book depreciation $60,000
(b) Interest revenue on municipal bonds $9,000
(c) Excess of estimated warranty expense over actual expenditures $54,000
(d) Unearned rent received $12,000
(e) Amortization of goodwill $30,000
(f) Excess of income reported under percentage-of-completion accounting for financial reporting over competed-contract accounting used for tax reporting $45,000
(g) Interest on indebtedness incurred to purchase tax-exempt securities $3,000
(h) Unrealized losses on marketable securities recognized for financial reporting $18,000
Assume that Dider corp. had pretax accounting income [before considering items (a) through (h)] of $900,000 for the current year. Compute the taxable income for the current year. Write your figures in the form attached and show all your work
Click here for the solution: The following differences between financial and taxable income were reported by Dider Corporation for the current year
(a) Excess of tax depreciation over book depreciation $60,000
(b) Interest revenue on municipal bonds $9,000
(c) Excess of estimated warranty expense over actual expenditures $54,000
(d) Unearned rent received $12,000
(e) Amortization of goodwill $30,000
(f) Excess of income reported under percentage-of-completion accounting for financial reporting over competed-contract accounting used for tax reporting $45,000
(g) Interest on indebtedness incurred to purchase tax-exempt securities $3,000
(h) Unrealized losses on marketable securities recognized for financial reporting $18,000
Assume that Dider corp. had pretax accounting income [before considering items (a) through (h)] of $900,000 for the current year. Compute the taxable income for the current year. Write your figures in the form attached and show all your work
Click here for the solution: The following differences between financial and taxable income were reported by Dider Corporation for the current year
Sunday, September 27, 2015
Here are the comparative income statements of Winfrey Corporation
E13-6 Here are the comparative income statements of Winfrey Corporation.
WINFREY CORPORATION
Comparative Income Statements
For the Years Ended December 31
2010 2009
Net sales $598,000 $520,000
Cost of goods sold 477,000 450,000
Gross profit $121,000 $ 70,000
Operating expenses 80,000 45,000
Net income $ 41,000 $ 25,000
Instructions
(a) Prepare a horizontal analysis of the income statement data for Winfrey Corporation using 2009 as a base. (Show the amounts of increase or decrease.)
(b) Prepare a vertical analysis of the income statement data for Winfrey Corporation for both years.
Click here for the solution: Here are the comparative income statements of Winfrey Corporation
WINFREY CORPORATION
Comparative Income Statements
For the Years Ended December 31
2010 2009
Net sales $598,000 $520,000
Cost of goods sold 477,000 450,000
Gross profit $121,000 $ 70,000
Operating expenses 80,000 45,000
Net income $ 41,000 $ 25,000
Instructions
(a) Prepare a horizontal analysis of the income statement data for Winfrey Corporation using 2009 as a base. (Show the amounts of increase or decrease.)
(b) Prepare a vertical analysis of the income statement data for Winfrey Corporation for both years.
Click here for the solution: Here are the comparative income statements of Winfrey Corporation
A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year
EX 9-2 A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year:
Sales $254,000
Cost of the goods sold $122,000
Gross profit $132,000
Operating expenses $156,000
Loss from operations ($24,000)
It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Since Royal Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
a. Prepare a differential analysis report, dated March 3, 2010, for the proposed discontinuance of Royal Cola.
b. Should Royal Cola be retained?
Click here for the solution: A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year
Sales $254,000
Cost of the goods sold $122,000
Gross profit $132,000
Operating expenses $156,000
Loss from operations ($24,000)
It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 20% of the operating expenses are fixed. Since Royal Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.
a. Prepare a differential analysis report, dated March 3, 2010, for the proposed discontinuance of Royal Cola.
b. Should Royal Cola be retained?
Click here for the solution: A condensed income statement by product line for British Beverage Inc. indicated the following for Royal Cola for the past year
Friday, September 18, 2015
The comparative condensed income statements of Hendi Corporation are shown below
E15-4 The comparative condensed income statements of Hendi Corporation are shown below.
HENDI CORPORATION
Comparative Condensed Income Statements
For the Years Ended December 31
2009 2008
Net sales $600,000 $500,000
Cost of goods sold 483,000 420,000
Gross profit 117,000 80,000
Operating expenses 57,200 44,000
Net income $ 59,800 $ 36,000
Instructions
a) Prepare a horizontal analysis of the income statement data for Hendi Corporation using 2008 as a base. (Show the amounts of increase or decrease.)
b) Prepare a vertical analysis of the income statement data for Hendi Corporation in columnar form for both years.
Click here for the solution: The comparative condensed income statements of Hendi Corporation are shown below
HENDI CORPORATION
Comparative Condensed Income Statements
For the Years Ended December 31
2009 2008
Net sales $600,000 $500,000
Cost of goods sold 483,000 420,000
Gross profit 117,000 80,000
Operating expenses 57,200 44,000
Net income $ 59,800 $ 36,000
Instructions
a) Prepare a horizontal analysis of the income statement data for Hendi Corporation using 2008 as a base. (Show the amounts of increase or decrease.)
b) Prepare a vertical analysis of the income statement data for Hendi Corporation in columnar form for both years.
Click here for the solution: The comparative condensed income statements of Hendi Corporation are shown below
Sunday, September 13, 2015
P4-3 For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes
P4-3 Income statement presentation
For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes of $1,200,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material.
1. During 2011, one of Micron's factories was damaged in an earthquake. As a result, the firm recognized a loss of $800,000. The event is considered unusual and infrequent.
2. In November of 2011, Micron sold its Waffle House restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May of 2011. The operating income of the chain from January 1, 2011, through November was $160,000 and the loss on sale of the chain's assets was $300,000.
3. In 2011, Micron sold one of its six factories for $1,200,000. At the time of the sale, the factory had a carrying value of $1,100,000. The factory was not considered a component of the entity.
4. In 2009, Micron's accountant omitted the annual adjustment for patent amortization expense of $120,000. The error was not discovered until December 2011.
Required:
1. Prepare Micron's income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2011. Assume an income tax rate of 30%. Ignore EPS disclosures.
2. Briefly explain the motivation for segregating certain income statement events from income from continuing operations.
Click here for the solution: P4-3 For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes
For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes of $1,200,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material.
1. During 2011, one of Micron's factories was damaged in an earthquake. As a result, the firm recognized a loss of $800,000. The event is considered unusual and infrequent.
2. In November of 2011, Micron sold its Waffle House restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May of 2011. The operating income of the chain from January 1, 2011, through November was $160,000 and the loss on sale of the chain's assets was $300,000.
3. In 2011, Micron sold one of its six factories for $1,200,000. At the time of the sale, the factory had a carrying value of $1,100,000. The factory was not considered a component of the entity.
4. In 2009, Micron's accountant omitted the annual adjustment for patent amortization expense of $120,000. The error was not discovered until December 2011.
Required:
1. Prepare Micron's income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2011. Assume an income tax rate of 30%. Ignore EPS disclosures.
2. Briefly explain the motivation for segregating certain income statement events from income from continuing operations.
Click here for the solution: P4-3 For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes
Sunday, September 6, 2015
How does EVA differ from residual income?
How does EVA differ from residual income?
Click here for the solution: How does EVA differ from residual income?
Click here for the solution: How does EVA differ from residual income?
Alciatore Company earned a net income of $150,000 in 2011
P 19-16 Alciatore Company earned a net income of $150,000 in 2011. The weighted-average number of common shares outstanding for 2011 was 40,000. The average stock price for 2011 was $33. Assume an income tax rate of 40%.
Required:
For each of the following independent situations, indicate whether the effect of the security is antidilutive for diluted EPS.
1. 10,000 shares of 7.7% of $100 par convertible, cumulative preferred stock. Each share may be converted into two common shares.
2. 8% convertible 10-year, $500,000 of bonds, issued at face value. The bonds are convertible to 5,000 shares of common stock.
3. Stock options exercisable at $30 per share after January 1, 2013.
4. Warrants for 1,000 common shares with an exercise price of $35 per share.
5. A contingent agreement to issue 5,000 shares of stock to the company president if net income is at least $125,000 in 2012.
Click here for the solution: Alciatore Company earned a net income of $150,000 in 2011
Required:
For each of the following independent situations, indicate whether the effect of the security is antidilutive for diluted EPS.
1. 10,000 shares of 7.7% of $100 par convertible, cumulative preferred stock. Each share may be converted into two common shares.
2. 8% convertible 10-year, $500,000 of bonds, issued at face value. The bonds are convertible to 5,000 shares of common stock.
3. Stock options exercisable at $30 per share after January 1, 2013.
4. Warrants for 1,000 common shares with an exercise price of $35 per share.
5. A contingent agreement to issue 5,000 shares of stock to the company president if net income is at least $125,000 in 2012.
Click here for the solution: Alciatore Company earned a net income of $150,000 in 2011
Sunday, August 23, 2015
Cypress Corporation has regular taxable income of $170,000
Cypress Corporation has regular taxable income of $170,000 (assume annual gross receipts are greater than $5 million) and regular tax liability of $49,550 for 2010. The corporation also has tax preference items amounting to $105,000. Calculate Cypress Corporation's alternative minimum tax liability. Assume Cypress Corporation is not a "small corporation".
Click here for the solution: Cypress Corporation has regular taxable income of $170,000
Click here for the solution: Cypress Corporation has regular taxable income of $170,000
Fisafolia Corporation has gross income from operations of $220,000 and operating expenses of $160,000 for 2010
Fisafolia Corporation has gross income from operations of $220,000 and operating expenses of $160,000 for 2010. The corporation also has $20,000 in dividends from publicly traded domestic corporations (ownership in all corporations was less than 20 percent).
a. Calculate the corporation's dividends received deduction for 2010.
b. Assume that instead of $220,000, Fisafolia Corporation has gross income from operations of $135,000. Calculate the corporation's dividends received deduction for 2010.
Click here for the solution: Fisafolia Corporation has gross income from operations of $220,000 and operating expenses of $160,000 for 2010
a. Calculate the corporation's dividends received deduction for 2010.
b. Assume that instead of $220,000, Fisafolia Corporation has gross income from operations of $135,000. Calculate the corporation's dividends received deduction for 2010.
Click here for the solution: Fisafolia Corporation has gross income from operations of $220,000 and operating expenses of $160,000 for 2010
Ulmus Corporation has $1,230,000 in taxable income for 2010
Ulmus Corporation has $1,230,000 in taxable income for 2010. Calculate the corporation's income tax liability for 2010.
Click here for the solution: Ulmus Corporation has $1,230,000 in taxable income for 2010
Click here for the solution: Ulmus Corporation has $1,230,000 in taxable income for 2010
Quince Corporation has taxable income of $450,000 for its 2010 calendar tax year
Quince Corporation has taxable income of $450,000 for its 2010 calendar tax year. Calculate the corporation's income tax liability for 2010 before tax credits.
Click here for the solution: Quince Corporation has taxable income of $450,000 for its 2010 calendar tax year
Click here for the solution: Quince Corporation has taxable income of $450,000 for its 2010 calendar tax year
Friday, August 21, 2015
Button Company has two temporary differences between its income tax expense and income taxes payable
E19-8 (Two Temporary Differences, One Rate, 3 years) Button Company has two temporary differences between its income tax expense and income taxes payable. The information is shown on page 1004.
2007 2008 2009
Personal Financial income $840,000 $910,000 $945,000
Excess depreciation expense on tax return (30,000) (40,000) (10,000)
Excess warranty expense in financial income 20,000 10,000 8,000
Taxable Income 830,000 880,000 943,000
Income tax rate for all years = 40%
Prepare the income tax expense sectin of the income statement for 2009, beginning with the line "Pretax financial income."
Click here for the solution: Button Company has two temporary differences between its income tax expense and income taxes payable
2007 2008 2009
Personal Financial income $840,000 $910,000 $945,000
Excess depreciation expense on tax return (30,000) (40,000) (10,000)
Excess warranty expense in financial income 20,000 10,000 8,000
Taxable Income 830,000 880,000 943,000
Income tax rate for all years = 40%
Prepare the income tax expense sectin of the income statement for 2009, beginning with the line "Pretax financial income."
Click here for the solution: Button Company has two temporary differences between its income tax expense and income taxes payable
CA19-1 (Objectives and Principles for Accounting for Income Taxes)
CA19-1 (Objectives and Principles for Accounting for Income Taxes) The amount of income taxes due to the government for a period of time is rarely the amount reported on the income statement for that period as income tax expense.
Instructions
(a) Explain the objectives of accounting for income taxes in general purpose financial statements.
(b) Explain the basic principles that are applied in accounting for income taxes at the date of the financial statements to meet the objectives discussed in (a).
(c) List the steps in the annual computation of deferred tax liabilities and assets.
Click here for the solution: CA19-1 (Objectives and Principles for Accounting for Income Taxes)
Instructions
(a) Explain the objectives of accounting for income taxes in general purpose financial statements.
(b) Explain the basic principles that are applied in accounting for income taxes at the date of the financial statements to meet the objectives discussed in (a).
(c) List the steps in the annual computation of deferred tax liabilities and assets.
Click here for the solution: CA19-1 (Objectives and Principles for Accounting for Income Taxes)
Saturday, August 1, 2015
Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73
E10-5 Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73.
Instructions:
a. What was Walls's net pay for the week?
b. Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries Payable; not Cash.)
c. Record the issuing of the check for Walls's pay in the general journal.
Click here for the solution: Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73
Instructions:
a. What was Walls's net pay for the week?
b. Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries Payable; not Cash.)
c. Record the issuing of the check for Walls's pay in the general journal.
Click here for the solution: Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73
Compute consolidated taxable income for the calendar year Moose Group
Compute consolidated taxable income for the calendar year Moose Group, which elected consolidated status immediately upon the creation of the two member corporations on January 1, 2010. All recognized income is ordinary in nature, and no intercompany transactions were completed during the indicated years.
Year Moose Corporation Elk Corporation
2010 $ 250,000 $ 50,000
2011 $ 250,000 (110,000)
2012 $ 250,000 (400,000)
2013 $ 250,000 75,000
Click here for the solution: Compute consolidated taxable income for the calendar year Moose Group
Year Moose Corporation Elk Corporation
2010 $ 250,000 $ 50,000
2011 $ 250,000 (110,000)
2012 $ 250,000 (400,000)
2013 $ 250,000 75,000
Click here for the solution: Compute consolidated taxable income for the calendar year Moose Group
Sunday, July 19, 2015
Briefly describe at least two similarities and two differences between U.S. GAAP and iGAAP with respect to income tax accounting
Briefly describe at least two similarities and two differences between U.S. GAAP and iGAAP with respect to income tax accounting.
Click here for the solution: Briefly describe at least two similarities and two differences between U.S. GAAP and iGAAP with respect to income tax accounting
Click here for the solution: Briefly describe at least two similarities and two differences between U.S. GAAP and iGAAP with respect to income tax accounting
South Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows
South Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 420,000
Extra depreciation taken for tax purposes (1,050,000)
Estimated expenses deductible for taxes when paid 840,000
Taxable income $ 210,000
Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three years. The estimated litigation expenses of $840,000 will be deductible in 2013 when settlement is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2010, assuming a tax rate of 40% for all years.
Click here for the solution: South Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows
Pretax financial income $ 420,000
Extra depreciation taken for tax purposes (1,050,000)
Estimated expenses deductible for taxes when paid 840,000
Taxable income $ 210,000
Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three years. The estimated litigation expenses of $840,000 will be deductible in 2013 when settlement is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2010, assuming a tax rate of 40% for all years.
Click here for the solution: South Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows
Sunday, July 12, 2015
Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million
Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum.
a. Complete the following table:
Leverage ration (debt/total assets)
0% 25% 50%
Total assets
Debt (at 12% interest)
Equity
Total liabilities and equity
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
effect of 20% decrease In EBIT to $2,000,000
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
effect of a 20% increase in EBIT to $3,000,000
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
b. Determine the percentage change in return on equity of a 20 percent decrease in expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of
i. 0%
ii. 25%
iii. 50%
c. Determine the percentage change in return on equity of a 20 percent increase expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of
i. 0%
ii. 25%
iii. 50%
d. Which leverage ratio yields the highest expected return on equity?
e. Which leverage ratio yields the highest variability (risk) in expected return on equity?
f. What assumption was made about the cost of debt (i.e., interest rate) under the various capital structures (i.e., leverage ratios)? How realistic is this assumption?
Click here for the solution: Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million
a. Complete the following table:
Leverage ration (debt/total assets)
0% 25% 50%
Total assets
Debt (at 12% interest)
Equity
Total liabilities and equity
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
effect of 20% decrease In EBIT to $2,000,000
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
effect of a 20% increase in EBIT to $3,000,000
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
b. Determine the percentage change in return on equity of a 20 percent decrease in expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of
i. 0%
ii. 25%
iii. 50%
c. Determine the percentage change in return on equity of a 20 percent increase expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of
i. 0%
ii. 25%
iii. 50%
d. Which leverage ratio yields the highest expected return on equity?
e. Which leverage ratio yields the highest variability (risk) in expected return on equity?
f. What assumption was made about the cost of debt (i.e., interest rate) under the various capital structures (i.e., leverage ratios)? How realistic is this assumption?
Click here for the solution: Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million
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