Question

No-Toxic-Toys currently has $400,000 of equity and is planning an $160,000 expansion to meet increasing demand for its product. The company currently earns $60,000 in net income and the expansion will yield $30,000 in additional income before any interest expense. The company has three options: (1) Do not expand, (2) Expand and issue $160,000 in debt that requires 12% annual interest, or (3) Expand and raise $160,000 from equity financing. Required For each of the three options, compute (a) net income and (b) return on equity (Net Income / Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.) 2 3 Equity Financing Don't Expand Debt Financing Income before interest expense Interest expense Net income Equity Return on equity

Answer 1

No-Toxic - Toys

	1	2	3
	Don't Expand	Debt	Equity
Income b4 Interest	$ 60000	$ 90000	$ 90000
Interest expenses		$ 19200
Net income	$ 60000	$ 70800	$ 90000
Equity	$ 400000	$ 400000	$ 560000
Return on equity	15%	17.7%	16.07%

Return on equity = ( Net income / Equity ) * 100