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The CIG Power Corporation expects to report earnings before interest and taxes of $25 million this year. Management has determined that the firm needs $10 million of new capital this year to fund its anticipated capital investments. One alternative is to borrow the funds from a syndicate of banks at a 15 percent rate of interest. Alternatively, CIG could sell $10 million of a new preferred stock that pays annual dividends of $1.4 million. The marginal tax rate for CIG is 40 percent.
a. What will be the "earnings after tax and available for common stockholders" if the money is borrowed?
b. What will be the "earnings after tax and available for common stockholders" if preferred stock is sold?
4. Patriot Industries recently sold its fin fabrication machine for $150,000. The machine originally cost $500,000 and has a current book value of $100,000. Patriot's marginal tax rate is 35 percent for ordinary income and 35 percent for capital gains income.
a. What amount of gain has Patriot received from this transaction?
b. Is this a capital or ordinary gain?
c. How much tax must Patriot pay on this transaction?
Determine the interest expense that Coley Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2009, assuming that the discount of $360,000 is amortized on a straight-line basis.
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The price of the policy is $1,800. There is a 10% chance of having an accident in which the car is a total loss.
Assume GESS has no internal sources of financing and does not pay dividends. Under these conditions, would the pecking order hypothesis influence the decision to use Plan A or Plan B?
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Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split and Fill in the amount that would appear in the stockholders' equity section for Klein Corporation at December 31, 2002.
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