Comparison Of Alternative Forms Of Financing

Comparison Of Alternative Forms Of Financingshown Below Is The Liabi

Comparison Of Alternative Forms Of FinancingShown below is the liabilities and stockholders' equity section of the balance sheet for Ingalls Company and Wilder Company. Each has assets totaling $4,214,260. Ingalls Co. Wilder Co. Current liabilities $ 300,000 Current liabilities $ 600,000 Long-term debt, 10% 1,200,000 Common stock ($20 par) 2,914,260 Common stock ($20 par) 2,014,260 Retained earnings (Cash dividends, Retained earnings (Cash dividends, $328,000 $220,000 $4,214,260 $4,214,260) For the year each company has earned the same income before interest and taxes.Ingalls Co. Wilder Co. Income before interest and taxes $1,800,000 $1,800,000 Interest expense 120,680 1,800,000 Income taxes (45%) 756,000 Net income $924,000 $990,000 At year end, the market price of Ingalls' stock was $101 per share, and Wilder's was $63.50. Make the following computations. (Round answers to 2 decimal places, e.g., 10.00.)(a) Compute Ingalls's return on total assets. %Compute Wilder's return on total assets. %(b) Compute Ingalls's return on stockholders' equity. %Compute Wilder's return on stockholders' equity. %(c) Neither company issued or reacquired shares during the year. Compute Ingalls's net income per share of stock. $Compute Wilder's net income per share of stock. $(d) From the point of view of net income, is it advantageous to the stockholders of Ingalls Co. to have the long-term debt outstanding? Yes or No.(e) What is Ingalls's book value per share. $What is Wilder's book value per share. $

Paper For Above instruction

The financial analysis of Ingalls Company and Wilder Company provides insights into their respective profitability, leverage, and shareholder value through various key ratios and measures derived from their financial statements. This examination reveals the implications of their capital structures and operational performance, offering valuable information for stakeholders to assess efficiency, risk, and return potential.

Introduction

Both Ingalls and Wilder companies have similar assets, totaling over four million dollars, but their liabilities and equity structures differ notably. Ingalls has a lower amount of current liabilities but a significantly higher amount of long-term debt. Conversely, Wilder possesses higher current liabilities and a slightly lower total of long-term debt and equity. This structural distinction influences their financial ratios, profitability, and overall investor perception.

Part (a): Return on Total Assets

Return on total assets (ROTA) indicates how efficiently each company utilizes its assets to generate earnings before interest and taxes (EBIT). The formula is:

ROTA = (Net Income + Interest Expense × (1 - Tax Rate)) / Total Assets

For Ingalls, interest expense is $120,680, and their EBIT is $1,800,000. The effective tax rate is 45%. The interest expense's after-tax impact is calculated, and then the return on assets determined:

Interest expense (after tax) = $120,680 × (1 - 0.45) ≈ $66,374.

Net income + interest expense after tax = $924,000 + $66,374 = $990,374.

ROTA (Ingalls) = $990,374 / $4,214,260 ≈ 23.52%

Similarly, Wilder's interest expense is assumed to be zero, as not specified, or the same as Ingalls, but the problem states equal EBIT and the same deductions apply. Since interest expense is not explicitly given for Wilder, it can be presumed negligible or zero, leading to:

ROTA (Wilder) = $990,000 / $4,214,260 ≈ 23.49%

Part (b): Return on Stockholders' Equity

Return on equity (ROE) measures profitability from the shareholders' perspective, calculated as:

ROE = Net Income / Total Stockholders' Equity

Total stockholders' equity is total assets minus total liabilities. For Ingalls:

Total liabilities = current liabilities + long-term debt = $300,000 + $1,200,000= $1,500,000.

Stockholders' equity = Assets - liabilities = $4,214,260 - $1,500,000 = $2,714,260.

ROE (Ingalls) = $924,000 / $2,714,260 ≈ 34.02%

For Wilder:

Total liabilities = $600,000 (current liabilities), long-term debt is not specified, but assuming similar structure, total liabilities including current liabilities sum to $600,000 plus other liabilities as indicated. Stockholders' equity = $4,214,260 - ($600,000 + possibly other liabilities). But since only current liabilities are given explicitly, and total assets, we proceed with the same approach:

Total liabilities assumed = $600,000 + $1,200,000 (long-term debt) = $1,800,000. Stockholders' equity = $4,214,260 - $1,800,000 = $2,414,260.

ROE (Wilder) = $990,000 / $2,414,260 ≈ 41.01%

Part (c): Earnings Per Share (EPS)

EPS is calculated as:

EPS = Net Income / Number of Shares Outstanding

Number of shares = Book value of stock divided by par value:

• Ingalls: $2,914,260 / $20 = 145,713 shares
• Wilder: $2,014,260 / $20 = 100,713 shares

EPS (Ingalls) = $924,000 / 145,713 ≈ $6.34

EPS (Wilder) = $990,000 / 100,713 ≈ $9.83

Part (d): Effect of Long-term Debt on Net Income

From a net income perspective, debt can be advantageous due to the tax shield effect—interest expenses are tax-deductible, reducing taxable income and thus increasing net income after taxes. Since Ingalls has interest expenses, some of its earnings are used to pay interest, but the tax savings can be beneficial for shareholders. Comparing net incomes, Ingalls' net income is slightly lower than Wilder's, but the leverage effect might enhance return on equity. Therefore, from net income perspective, having debt can be advantageous because of the tax shield.

Answer: Yes, it is advantageous

Part (e): Book Value per Share

Book value per share is calculated as:

Book Value per Share = Total Shareholders' Equity / Number of Shares Outstanding

For Ingalls:

Book value per share = $2,714,260 / 145,713 ≈ $18.63

For Wilder:

Book value per share = $2,414,260 / 100,713 ≈ $23.97

Conclusion

The comparative analysis reveals that Wilder has a higher return on assets, owing partly to differences in leverage and capital structure. The higher return on equity for Wilder indicates superior profitability from a shareholder perspective. The relatively higher earnings per share reflect a more favorable position for Wilder's shareholders. The strategic use of debt appears beneficial, owing to tax advantages, despite the associated risks. Overall, both companies demonstrate strong operational efficiency, but their capital structure choices significantly influence their financial ratios and investor appeal.

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