ssigoment> Open Assignment Problem 11-7A (Essay) Spahn Company manufactures back
ID: 2522027 • Letter: S
Question
ssigoment> Open Assignment Problem 11-7A (Essay) Spahn Company manufactures backpacks. Dunng 2017, Spahn issued bonds at 10% interest and used the cash proceeds to purchase treasury stock. The following man cial info mation is available fo Spahn Company for the years 2017 and 2016 2017201 Sales revenue $9,000,000$9,000,000 2240,0002,500,000 500,000140,000 70,000750,000 890,00011 026,000 Interest expense Dividends paid on common stock 00,000O, Dividends paid on preferred stock Total assets (year-end) Average total assets Total liablities (year-end) Avg. total common stockholders equity 14,500,00O0 16,875,000 15,587,50017,763,000 6,000,0003,000,000 9,400,000 14,100,000 14.3% 14.1% 20.6% 15.6% 39.7% 41.0% 41.4% 17.8% 6.8 times 24.2 times Return on Return on common stockholders' equity ratio Debt to assets ratio 5 9
Explanation / Answer
Change in Profitability of Company:
The Net Profit After Tax of Company has been reduced from 19.44% in 2016 to 17.44% in 2017, this is due to increase in interest expense due to the issue of new bonds for the redemption of common stock.
Change in Company Solvency:
The Debt to Asset Ratio of the Company has been increased multiple folds due to the issue of new bonds and buyback of common stock. It has been changed from 17.80% in 2016 to 41.40% in 2017. This shows that The Companies dependency on debt has been increased and it also makes a fear on future solvency and cash availability with the company.
Was the Decision Wise:
The Decision to issue bonds to Purchase Common Stock is not a Wise Decision, as, on one hand, it reduces the Profitability of the Business due to increase in interest cost and secondly it also creates More Dependency on Debts. As the Funds from Bonds issue is directly paid for the common stock, the company does not get any money from this and in turn, this will affects the Solvency of the Company. Debts Should be used for Working Capital Finance and Long-term Finance need of the Company and not for Purchase of Common Stock. If Common Stock is to be purchased then the same should be purchased from surplus arising out of company profit over the years.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.