Top management of Crane company is considering two alternative capital structures for 2027. The first (the "no debt" structure) would be to have $1,020,000 in assets and $1,020,000 in stockholders' equity, with 39,000 shares outstanding the entire year. This is the structure the company had on December 31, 2026. Alternatively, on January 1, 2027, the company could issue $370,000 in debt at 6% interest (the "with debt" structure) and immediately use the proceeds to repurchase 19,500 shares of stock for $390,000. The expected amount of net income (ignoring taxes), prior to any interest costs, is $102,000 for 2027. Assume the company pays dividends on common stock equal to its net income each year. Also, assume the accrued interest on the debt was paid at December 31, 2027, and the company has no other debt outstanding at year-end. Also, assume the company has $1,020,000 in assets at both the beginning and the end of 2027. (a) Your answer is correct. Compute the company's net income and earnings per share under both structures. (Ignore income taxes in your computations.) (Round earnings per share to 2 decimal places, e.g. 2.66.) (b) Pre-debt Net Income Adjustment for Interest Expense Net Income/(Loss) ✓ $ ✓ $ 69 Outstanding Shares く Earnings per Share eTextbook and Media 2026 102000 $ 0 102000 $ 39000 2027 102000 22200 i 79800 19500 $ 2.62 $ 4.09 Attempts: unlimited Compute the company's return on common stockholders' equity and return on assets under both structures. (Round answers to 2 decimal places, e.g. 2.66%.) Return on common stockholders' equity Return on assets 2026 % % 2027 % %
Top management of Crane company is considering two alternative capital structures for 2027. The first (the "no debt" structure) would be to have $1,020,000 in assets and $1,020,000 in stockholders' equity, with 39,000 shares outstanding the entire year. This is the structure the company had on December 31, 2026. Alternatively, on January 1, 2027, the company could issue $370,000 in debt at 6% interest (the "with debt" structure) and immediately use the proceeds to repurchase 19,500 shares of stock for $390,000. The expected amount of net income (ignoring taxes), prior to any interest costs, is $102,000 for 2027. Assume the company pays dividends on common stock equal to its net income each year. Also, assume the accrued interest on the debt was paid at December 31, 2027, and the company has no other debt outstanding at year-end. Also, assume the company has $1,020,000 in assets at both the beginning and the end of 2027. (a) Your answer is correct. Compute the company's net income and earnings per share under both structures. (Ignore income taxes in your computations.) (Round earnings per share to 2 decimal places, e.g. 2.66.) (b) Pre-debt Net Income Adjustment for Interest Expense Net Income/(Loss) ✓ $ ✓ $ 69 Outstanding Shares く Earnings per Share eTextbook and Media 2026 102000 $ 0 102000 $ 39000 2027 102000 22200 i 79800 19500 $ 2.62 $ 4.09 Attempts: unlimited Compute the company's return on common stockholders' equity and return on assets under both structures. (Round answers to 2 decimal places, e.g. 2.66%.) Return on common stockholders' equity Return on assets 2026 % % 2027 % %
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 15PROB
Related questions
Question
Transcribed Image Text:Top management of Crane company is considering two alternative capital structures for 2027. The first (the "no debt" structure)
would be to have $1,020,000 in assets and $1,020,000 in stockholders' equity, with 39,000 shares outstanding the entire year. This is
the structure the company had on December 31, 2026. Alternatively, on January 1, 2027, the company could issue $370,000 in debt
at 6% interest (the "with debt" structure) and immediately use the proceeds to repurchase 19,500 shares of stock for $390,000. The
expected amount of net income (ignoring taxes), prior to any interest costs, is $102,000 for 2027.
Assume the company pays dividends on common stock equal to its net income each year. Also, assume the accrued interest on the
debt was paid at December 31, 2027, and the company has no other debt outstanding at year-end.
Also, assume the company has $1,020,000 in assets at both the beginning and the end of 2027.
(a)
Your answer is correct.
Compute the company's net income and earnings per share under both structures. (Ignore income taxes in your computations.)
(Round earnings per share to 2 decimal places, e.g. 2.66.)
(b)
Pre-debt Net Income
Adjustment for Interest Expense
Net Income/(Loss)
Outstanding Shares
Earnings per Share
eTextbook and Media
$
2026
102000
$
0
$
102000
$
39000
6A
$
2.62
$
69
2027
102000
22200 i
79800
19500
4.09
Attempts: unlimited
Compute the company's return on common stockholders' equity and return on assets under both structures. (Round answers to 2
decimal places, e.g. 2.66%.)
Return on common stockholders' equity
Return on assets
2026
%
%
2027
%
%
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