Question: Arbor Corporation’s financial statements for 2011
Arbor Corporation’s financial statements for 2011 showed the following:
Income Statement
Revenues .................................................................$300,000
Expenses ..................................................................(196,000)
Interest expense .........................................................(4,000)
Pretax income .............................................................100,000
Income tax (40%) ......................................................(40,000)
Net income .................................................................$ 60,000
Balance Sheet
Assets .......................................................................$360,000
Liabilities (average interest rate, 10%) ....................$ 40,000
Common stock, par $10...............................................230,000
Retained earnings ........................................................90,000
$360,000
Notice in these data that the company had a debt of only $40,000 compared with common stock outstanding of $230,000. A consultant recommended the following: debt, $90,000 (at 10 percent) and common stock outstanding of $180,000 (18,000 shares) . That is, the company should finance the business with more debt and less owner contribution.
Required (round to nearest percent):
1. You have been asked to develop a comparison between ( a ) the actual results and ( b ) the results had the consultant’s recommendation been followed. To do this, you develop the following schedule:
2. Based on the completed schedule in requirement (1), provide a comparative analysis and interpretation of the actual results and the consultant’s recommendation.
Transcribed Image Text:
Actual Results Results with an Increase in Item for 2011 Debt and Reduction in Equity a. Total debt b. Total assets c. Total stockholders' equity d. Interest expense (total at 10 percent) e. Net income f. Return on total assets g. Earnings available to stockholders: (1) Amount (2) Per share (3) Return on stockholders' equity
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