Reference no: EM133063399

Question - Mack Company, HappyDay's branch, plans to invest $50,000 in land that will produce annual rent revenue equal to 15 percent of the investment, starting on January 1, Year 3. The revenue will be collected in cash at the end of each year, starting December 31, Year 3. Mack can obtain the cash necessary to purchase the land from two sources. Funds can be obtained by issuing $50,000 of 10 percent, five-year bonds at their face amount. Interest due on the bonds is payable on December 31 of each year with the first payment due on December 31, 2021. Alternatively, the $50,000 needed to invest in land can be obtained from equity financing. In this case, the stockholders (holders of the equity) will be paid a $5,000 annual cash dividend. Mack Company is in a 30 percent income tax bracket.

1. Prepare an income statement and statement of cash flows for Mack Company for Year 3 under the two alternative financing proposals (debt financing and equity financing).

2. Explain why one financing alternative provides more net income but less cash flow than the other.