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In: Finance
President and Chairman of Sky Company plan to have the company issue $700 million of new...
President and Chairman of Sky Company plan to have the company issue $700 million of new equity and use the proceeds to pay off some of its outstanding debts. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income, and its tax rate all remain constant. What impact could this decision have on the financial statements of the company? Explain with reasoning
Solutions
Expert Solution
Impact on the Income Statement:
- Interest expenses will reduce as there will be lower interest due to lower debt
- Taxable income (Earnings before taxes) will be higher
- Taxes will be higher (Interest is lower and hence interest tax shields will be lower)
- Net income will be higher
- Since company doesn't pay any dividends, retained earnings will be higher
Impact on the Balance Sheet
- Total value under equity of the company will increase
- First due to issuance of new shares (this will increase the value under paid up capital and additional paid up capital)
- Secondly due to increase in retained earnings
- Total value under debt (bonds) of the company will decrease.
Impact on the cash flow statement:
- Interest expenses will be lower
- Taxes will be higher
jeff jeffy answered 2 years agoRelated Solutions
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machinery in its Nevada mine. It can obtain a bank loan for 100% of
the purchase price, or it can lease the machinery. Assume that the
following facts apply:
1. The machinery falls into the MACRS 3-year class.
2. Under either the lease or the purchase, Big Sky must pay for
insurance, property taxes, and maintenance.
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Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It...
Big Sky Mining Company
must install $1.5 million of new machinery in its Nevada mine. It
can obtain a bank loan for 100% of the purchase price, or it can
lease the machinery. Assume that the following facts apply:
The machinery falls into the
MACRS 3-year class. (The depreciation rates for Year 1 through Year
4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.)
Under either the lease or the
purchase, Big Sky must pay for insurance, property taxes, and...
Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It...
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$1.5 million of new machinery in its Nevada mine. It can obtain a
bank loan for 100% of the purchase price, or it can lease the
machinery. Assume that the following facts apply:
The machinery falls into the MACRS 3-year class
Under either the lease or the purchase, Big Sky must pay for
insurance, property taxes, and maintenance.
The firm’s tax rate is 40%
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following facts apply.
• The machinery falls into the MACRS 3-year class (.3333, .4445,
.1481. .0741).
• Under either the lease or the purchase, Big Sky must pay for
insurance, property taxes, and maintenance.
• The firm’s tax rate is 40%.
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