Effects of leverage to return on ordinary equity. You are in the process of organizing a...
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Effects of leverage to return on ordinary equity. You are in the process of organizing a new company to produce and sell a lady beauty product You feel that P5 million would be enough to finance the new company's operations. You are considering following financing mix in raising the needed money for investment Straight ordinary equity Shareholders' equity mix: Leverage and equity mix: All the P5 million would be raised by issuance of ordinary shares P3.5 million would be raised from ordinary shares issuances and P1.5 million from the sale of P100 pr 10% preference share P3.0 million would be obtained from ordinary shares issuances and P2.0 million from issuance of a 12% bonds payable. You estimated that the operations would generate an earning of P2 million each year before interest and taxes. The tax rate is 40% Required: Determine the best financing mix that would maximize return on ordinary equity. Effects of leverage to return on ordinary equity. You are in the process of organizing a new company to produce and sell a lady beauty product You feel that P5 million would be enough to finance the new company's operations. You are considering following financing mix in raising the needed money for investment Straight ordinary equity Shareholders' equity mix: Leverage and equity mix: All the P5 million would be raised by issuance of ordinary shares P3.5 million would be raised from ordinary shares issuances and P1.5 million from the sale of P100 pr 10% preference share P3.0 million would be obtained from ordinary shares issuances and P2.0 million from issuance of a 12% bonds payable. You estimated that the operations would generate an earning of P2 million each year before interest and taxes. The tax rate is 40% Required: Determine the best financing mix that would maximize return on ordinary equity.
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Answer I Retain Earnings Share Capital means both Equity and Preference too Hence Bonds Payable will ... View the full answer
Related Book For
Introduction to Managerial Accounting
ISBN: 978-1259105708
5th Canadian edition
Authors: Peter C. Brewer, Ray H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan
Posted Date:
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