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Determine the effect on profit

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Question - SpringTime Ltd is considering the following two alternatives for financing extensions.

1. Issue 65,000 shares at $19 per share. (Cash dividends have not been paid; nor is the payment of any cash dividend contemplated.)

2. Issue 10%, 10-year debentures at face value for $1,235,000. (Assume that 10% is also the market rate for similar securities.)

It is estimated that the company will earn $454,000 before interest and taxes as a result of the extension. The company has an estimated tax rate of 30% and has equity of $2,154,000 prior to the new financing.

Required - Determine the effect on profit and return on ordinary shareholders' equity?

Reference no: EM132556714

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