No-Toxic-Toys currently has $200,000 of equity and is planning an $80,000 expansion to meet increasing
demand of its product. The company currently earns $50,000 in net income, and the expansion will yield
$25,00 in additional income before any interest expense. The company has three options: (1) do not
expand, (2) expand and issue $80,000 in debt that requires payments of 8% annual interest or (3) expand
and raise $80,000 from equity financing. For each option, compute (a) net income and (b) return on equity
to 1 decimal place.
Don't Expand Debit Financing Equity Financing
Sample Solution