The balance sheet as of December 31, 2012, for Boyton Sons follows:

The company needs capital to finance operations and purchases new equipment. Boyton is not certain how much money it will need and is considering one of the following three year notes payable. Each note would mature on January 1, 2016.

Required:
(a) Determine the effective interest rate of each note.
(b) Compute the amounts that would complete that would complete the following table:
Interest Expense (A) Interest Expense (B)Interest Expense (C)
YEAR 1
YEAR 2
YEAR 3
(c) Assume that Boyton can earn a 12 percent return on the borrowed money and that it reinvests all interest that it earns. Compute the annual income (return – interest expense) generated from each of the three notes.
(d) Compute the amounts that would complete the following chart.
Debt/Equity (A)Debt/Equity (B) Debt/Equity (C)
12/31/13
12/31/14
12/31/15
(e) Discuss some of the trade-offs involved in choosing among the three notes.

Transcribed Image Text:

Liabilities and Shareholders' Equity Current liabilities Long-term liabilities Shareholders' equity Total liabilities and shareholders' equity Assets S 40,000 Current assets Noncurrent assets S 30.000 80,000 60,000 30.000 Total assets $120,000 S120.000