Case Study 9-2 Innovative Company

Only available on StudyMode
  • Download(s) : 309
  • Published : December 26, 2010
Open Document
Text Preview
Case 9‐2 Innovative Company
Descriptions ACC invested capital Debt Preferred stock Capital Common stock structure Gale & Yeaton's shares Common shareholders' equity of IEC Income statement Income after income  taxes but before interest  costs and tax savings  Interest expense Tax savings Net income after income  taxes, interest costs and  tax savings.  Preferred dividend  expense Net income after  preferred dividends Common shareholders’ equity Return on common  shareholders’ equity Proposal 1 Formula Amount explanation (USD) 1,200,000 1,100,000 0 100,000 900,000 1,000,000 Proposal 2 Formula Amount explanation (USD) 1,200,000 200,000 900,000 100,000 900,000 1,000,000 Proposal 3 Formula Amount explanation (USD) 1,200,000 600,000 0 600,000 900,000 1,500,000 Proposal 4 Formula Amount explanation (USD) 1,200,000 300,000 0 900,000 900,000 1,800,000

1,100,000x8% 88,000x34% 300,000‐ 88,000+29,920

300,000 88,000 200,000x8% 29,920 16,000x34%

300,000 16,000 600,000x8% 5,440

300,000 48,000 300,000x8% 16,320

300,000 24,000 8,160

241,920 0 241,920 1,000,000 0.24 900,000x10%

289,440 90,000 199,440 1,000,000 0.20

268,320 0 268,320 1,500,000 0.18

284,160 0 284,160 1,800,000 0.16

Answer 1

Answer 2

Pre‐tax earning and return of ACC ‐Interest of loan ‐Preferred dividend ‐Common dividend In regards to proposal A

1,100,000x8% 241,920x(1:10)

112,192 88,000 200,000x8% 0 900,000x10% 24,192 199,440x(1:10)

125,944 16,000 600,000x8% 90,000 19,944 268,320x(6:15)

155,328 48,000 300,000x8% 0 107,328 284,160x(9:18)

166,080 24,000 0 142,080

‐ The partners should reject it because ratio of Debt/Equity (1,1:1)>1, too risky, unsound for an industrial company. They are correct. 

Answer 3 In regards to proposal B '‐ ACC also should reject it because the pre‐tax earning and return on its $1.2 mln investment is very low in comparison with  proposals of C and D. They are correct. Answer 4...
tracking img