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Question
On June 30, 19X1, the Alexander Bosh Coffee Co.'s balance sheet and income statement are as follows:| Balance Sheet | Income Statement | ||
| June 30, 19X1 | June 30, 19X1 | ||
| Current assets | $800,000 | Net operating income | $600,000 |
| Net fixed assets | 700,000 | Less: interest expense | (108,000) |
| Total assets | $1,500,000 | Earnings before taxes | 492,000 |
| Accounts payable | $300,000 | Less: taxes (34%) | (167,280) |
| S-T notes payable (15%) | 500,000 | Net income | $324,720 |
| Total current liabilities | $800,000 | ||
| Long-term debt (11%) | $300,000 | ||
| Common equity | 400,000 | ||
| Total | $1,500,000 |
b. Recalculate the ratios from (a) and assess the change in the firm's liquidity if the firm plans to issue $500,000 in common stock and use the proceeds to retire the firm's notes payable.
c. What effect would the change proposed in question b have on return on common equity (net income/common equity)?
Answer
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