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:

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
2. Based on the completed schedule in requirement (1), provide a comparative analysis and interpretation of the actual results and the consultant'srecommendation.

Transcribed Image Text:

Actual Results for 2011 Results with an Increase in Debt and Reduction in Equity Item