The Kerlene Corporation is considering a plan in which it would increase the siz
ID: 2513057 • Letter: T
Question
The Kerlene Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $3,000,000 per year in years 1-3, and $5,000,000 per year in years 4-9. To increase its operations the company would issue $30,000,000, 11%, 9-year bonds. The company expects to be able to issue the bonds at their principal. Calculate the Corporation's total expected 9-year increase in income before taxes after considering the cost of borrowing. a. $3,300,000 decrease b. $9,300,000 increase c. $29,700,000 decrease d. $39,000 increase The Kerlene Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $3,000,000 per year in years 1-3, and $5,000,000 per year in years 4-9. To increase its operations the company would issue $30,000,000, 11%, 9-year bonds. The company expects to be able to issue the bonds at their principal. Calculate the Corporation's total expected 9-year increase in income before taxes after considering the cost of borrowing. a. $3,300,000 decrease b. $9,300,000 increase c. $29,700,000 decrease d. $39,000 increase The Kerlene Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $3,000,000 per year in years 1-3, and $5,000,000 per year in years 4-9. To increase its operations the company would issue $30,000,000, 11%, 9-year bonds. The company expects to be able to issue the bonds at their principal. Calculate the Corporation's total expected 9-year increase in income before taxes after considering the cost of borrowing. a. $3,300,000 decrease b. $9,300,000 increase c. $29,700,000 decrease d. $39,000 increaseExplanation / Answer
Solution:
Year
Income before interest and taxes
Interest on Bonds ($3,000,000*11%)
Income before tax after deducting interest on bonds
1
$3,000,000
$3,300,000
-$300,000
2
$3,000,000
$3,300,000
-$300,000
3
$3,000,000
$3,300,000
-$300,000
4
$5,000,000
$3,300,000
$1,700,000
5
$5,000,000
$3,300,000
$1,700,000
6
$5,000,000
$3,300,000
$1,700,000
7
$5,000,000
$3,300,000
$1,700,000
8
$5,000,000
$3,300,000
$1,700,000
9
$5,000,000
$3,300,000
$1,700,000
$9,300,000
Total Expected 9 year increase in income before taxes after considering cost of borrowing = $9,300,000
Hence, the correct option is b. $9,300,000 increase
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Year
Income before interest and taxes
Interest on Bonds ($3,000,000*11%)
Income before tax after deducting interest on bonds
1
$3,000,000
$3,300,000
-$300,000
2
$3,000,000
$3,300,000
-$300,000
3
$3,000,000
$3,300,000
-$300,000
4
$5,000,000
$3,300,000
$1,700,000
5
$5,000,000
$3,300,000
$1,700,000
6
$5,000,000
$3,300,000
$1,700,000
7
$5,000,000
$3,300,000
$1,700,000
8
$5,000,000
$3,300,000
$1,700,000
9
$5,000,000
$3,300,000
$1,700,000
$9,300,000
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