5.Meteor Corporation expects net income of $2,925,000 for 2007 Pretax earnings were $4.5 million. The firm's total assets for 2007 were $30 million. It had no liabilities or preferred stock but had 2 million shares of common stock outstanding. Meteor is considering issuing $10 million of bonds to repurchase 500,000 shares of its common stock. If the debt had been outstanding in 2007, Meteor would have paid $800,000 in interest expense. Meteor's income tax rate is 35%.
Required:
Calculate return on equity for 2007 as reported and as it would have been if the debt had been issued.
6.Projected information for 2007 is provided below for Terremark Corporation:
(in thousands, except per share amounts)
Operating income$ 500
Interest expense75
Income taxes (40%)170
Net income255
Earnings per share (100,000 shares)2.55
Total assets4,250
Total liabilities1,500
Total stockholders' equity2,750
Terremark has the opportunity to acquire additional assets for $140,000. These assets are expected to increase operating income by $21,000 annually. They could be financed either by selling 50,000 shares of stock or issuing debt (at 8%).
Required:
Prepare a
projected (estimated)
income statement for each financing alternative, starting with operating income. Compute
projected (estimated)
return on assets and return on equity under each alternative. How should Terremark finance the acquisition?