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Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? Why?

a.

The company would have to pay less taxes.

b.

The company's taxable income would fall.

c.

The company's interest expense would remain constant.

d.

The company would have less common equity than before.

e.

The company's net income would increase.

Solutions

Expert Solution

e. The company's net income would increase.

Explanation:

On repayment of outstanding bonds. Interest expense will decrease and automatically net income would increase.

jeff jeffy answered 2 years ago
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