Question

Edgemont Repairs began operations on January 1, 2013. The 2013, 2014, and 2015 financial statements follow:


On January 1, 2015, the company expanded operations by taking out a $40,000 long-term loan at a 10 percent annual interest rate.

REQUIRED:
a. Compute return on equity, return on assets, common equity leverage, capital structure leverage, profit margin, and asset turnover.
b. On January 1, 2015, the company’s common stock was selling for $20 per share. Assume that Edgemont issued 2,000 shares of stock, instead of borrowing the $40,000, to raise the cash needed to pay for the January 1 expansion. Recompute the ratios in (a) for 2015. Ignore any tax effects.
c. Should the company have issued the equity instead of borrowing the funds?Explain.


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  • CreatedAugust 19, 2014
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