QUESTION I

ABC Corp management has decided that the required rate of return for the company should be 8%. Total assets on the December 31, 2019 ABC Corp balance sheet are $500,000. If ABCs Net Income for 2019 is $40,000, has the company met the required return of 8%? Use residual income to determine your answer.

PART 2

A. If the bank requires that a corporation keep the debt to total assets ratio at 45% maximum, determine the capital structure (in dollars of debt and equity) of a company that has total assets of $2,000,000.

B. Why is a lower level of debt, in a corporations capital structure, considered a conservative financial structure?