9.Vector Corporation expects net income of $1,800,000 for 2007. Pretax earnings were $3 million. The firm's total assets for 2007 were $40 million. It had no liabilities or preferred stock but had 3 million shares of common stock outstanding. Vector is considering issuing $17 million of bonds to repurchase 1,000,000 shares of its common stock. If the debt had been outstanding in 2007, Vector would have paid $1,200,000 in interest expense. Vector 's income tax rate is 40%.
Required:
Calculate return on equity for 2007 as reported and as it would have been if the debt had been issued.
10.Projected information for 2007 is provided below for Transmuter Corporation:
(in thousands, except per share amounts)
Operating income$1,300
Interest expense140
Income taxes (40%)464
Net income696
Earnings per share (100,000 shares)6.96
Total assets9,200
Total liabilities4,100
Total stockholders' equity5,100
Transmuter has the opportunity to acquire additional assets at a price of $180,000. The additional assets are expected to increase operating income by $40,000 annually. They could be financed either by selling 80,000 shares of stock or issuing debt (at 9%).
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 Transmuter finance the acquisition?