I need question 1 and 2 answered. See the case attached.
1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt, what would
the impact be on the firm's shareholders?
2. What does "homemade leverage" mean? Using the data in the case explain how a shareholder
might be able to use homemade leverage to create the same payoffs as achieved by the firm.
1. If Symonds Electronics Inc. was to raise all of the required capital by issuing debt, what would the impact be on the firm's shareholders?
If Symonds Electronics Inc were to raise all the required capital by issuing debt the impact on the firm's shareholders would different with different levels of revenue raised. In finance it is advisable to consider the most conservative estimate. It is estimated that the revenue of Symonds may increase anywhere between 10% and 50%. If we consider the most conservative estimate of an increase in revenue by 10% we can reconstruct the Income Statement provided by Andrews as follows:
Cost of Goods Sold 11,550,000
Gross Profits 4,950,000
Selling & Admin. Exp. 825,000
Depreciation 1, 650,000
Earnings Before I &T 2,475,000
Interest (10%) 500,000
Earnings Before Taxes 1,975,000
Taxes (40%) 790,000
Net Income 1, 185,000
Decrease in ...
Finance case is discussed in great detail in this solution.