can you help me with this problem about financial leverage?

Sifert Corporation is intending to raise additional capital of 500,000 to increase its sales by 800,000. The following proposals have been presented:

Proposal A: Obtain a 5-year, 15% loan of 500,000.

Proposal B: Obtain a 5-yr, , 15% loan of 300,000 and raise the balance by issuing a stock rights to enable stockholders to subscribe to additional shares at the rate of 1-for-2 for 200 per share.

Proposal C: Issue a stock rights to shareholders to enable them to subscribe to additional shares at the rate of 1.25-for-1 for 200 per share.

St present, Sifert Corp. realizes income of 180,000 before interest and income taxes. Contribution margin percentage (p/v ratio) is 25%. Income Tax is 35%. The balance sheet shows:

Assets.............................600,000

Liabilities..........................200,000

Capital Stock,par 100........200,000

Premium on Cap. Stock.....40,000

Retained Earnings.............160,000

a. Determine the effects of each proposal on:

(1) earnings per share

(2) rate of return on owner's equity

(3) debt/equity ratio

b. state which proposal you would prefer...and why??

i really dont have any background with financial leverage,

pla. heLp me. :)

God bless you :)

2 Answers

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  • 10 years ago
    Favorite Answer

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  • Eddy T
    Lv 7
    10 years ago

    I think you have not been doing much business with your business. And you are also the largest shareholder. So I think your proposal B is the best option for you. Take step by step on your sales.

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