Analyzing Financial Data

Problem 6 .6

a ) Income Statement Extract after Decision to finance with Debt

Operating Profit (15 ,000 ,000 x 1 .20 ) 18 ,000 ,000

Interest Expense 4 ,800 ,000 (10 ,000 ,000 x 15 6 ,300 ,000

Earnings before tax 11 ,700 ,000

Income Tax Expense (11 ,700 ,000 x 40 ) 4 ,680 ,000

Net Income 7 ,020 ,000

Income Statement Extract after Decision to finance with Equity

I presume that the nominal value of the equity common stock is 1 per share Financial Leverage Index :b ) Management should not

solely focus on financial factors like the ones outlined in part (a ) of this question . Qualitative characteristics should also be taken into account , because they also hold an important affect on the organisation . For instance , management should consider the willingness of common stockholders to a new issue of common stock Normally a new issue of common stock leads towards a fall in the share price due to an increase in the supply of stock . In addition the proportion of shareholders will increase and shareholders that hold a significant voting power may be reluctant for this to happen . The debt decision will also hold an affect on common stockholders . A growth strategy is frequently regarded as a risky scheme due to the considerable financial commitments that it encompasses . This is increasingly the case when debt finance is used . Additional risk imposed on common stockholders resulting from the debt decision may be highly uncomfortable especially if the return on the new investment...