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Interest expenses

200,000 in assets to get into operation with only 2 financing alternatives 1. (all equity-all common stock) 2.50% equity and 50percent debt. You will put the entire 200,000 needed to purchase the assets if 50 percent debt financing is used you will contribute only 100,000 of your own funds and the remaining 100,000 will be obtained from the creditors say a bank loan at 10% interest rate. Please fill all the ? spaces and explain your answer.

balance sheet sotck stock debt

current assets $100,000 $100,000
fixed assets $100,000 $100,000
total assets $200,000 $200,000
bank loan @10% cost 0 ?
common stock $200,000 ?
income statement
revenues $150,000 $150,000
operating costs $100,000 $100,000
operating income $50,000 $50,000
interest expense 0 ?
taxable income (40%rate) ? ?
net income ? ?
return on investment ? ?.

Solution Preview

1) Interest expenses= Loan * Interest rate

Hence interest for the stock debt option= 100000*10%
=$10000

2) Taxable Income = Operating income -interest ...

Solution Summary

Response provides steps to compute the Interest expenses.

$2.19