5 How credit terms affect financial statements LO 7-5 Dodson Co. is planning to

Question

5 How credit terms affect financial statements LO 7-5

Dodson Co. is planning to finance an expansion of its operations by borrowing $53,200. City Bank has agreed to loan Dodson the funds. Dodson has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $5,320 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 10 percent for each option.

What amount of interest will Dodson pay in year 1? (Round your answers to nearest whole dollar amount.)

(1) UNDER OPTION 1 ( )

(2) UNDER OPTION 2 ( )

Return on investment 7 LO 15-6

Helton Corporation’s balance sheet indicates that the company has $240,000 invested in operating assets. During 2014, Helton earned operating income of $54,000 on $456,000 of sales.

Compute Helton’s profit margin for 2014. (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).) PROFIT MARGIN ( % )

Compute Helton’s turnover for 2014. (Round your answer to 2 decimal places.)

TURNOVER ( ) TIMES

Compute Helton’s return on investment for 2014. (Round intermediate calculations and final answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

RETURN ON INVESTMENT ( %)

Recompute Helton’s ROI under each of the following independent assumptions. (Do not round intermediate calculations. Round your answers to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

Sales increase from $456,000 to $616,000, thereby resulting in an increase in operating income from $54,000 to $70,000.

Sales remain constant, but Helton reduces expenses, resulting in an increase in operating income from $54,000 to $60,000.

Helton is able to reduce its invested capital from $240,000 to $180,000 without affecting operating income.

RETURN ON INVESTMENT

(1) ___________________ %

(2) ___________________ %

(3) ___________________ %

Dodson Co. is planning to finance an expansion of its operations by borrowing $53,200. City Bank has agreed to loan Dodson the funds. Dodson has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $5,320 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 10 percent for each option.

Explanation / Answer

LO 7-5   

amount borrowed = $53,200 Interest rate = 10%

Option 1

interest payment at the end of year =amount of capital borrowed * rate of interest = $53,200 * .10 = $5,320

option 2

interest amount will remain same as the amount borrowed for the year is same $53,200

interest payment at the end of year =amount of capital borrowed * rate of interest = $53,200*.10 = $5,320

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