Question

No-Toxic-Toys currently has $450,000 of equity and is planning an $180,000 expansion to meet increasing demand for its product. The company currently earns $112,500 in net income, and the expansion will yield $56,250 in additional income before any interest expense.

Answer 1

Answer:

The question is incomplete,so I decided to google it and i found below complete question from which i took the interest expense % as well as the requirement of this question:

No-Toxic-Toys currently has $450,000 of equity and is planning an $180,000 expansion to meet increasing demand for its product. The company currently earns $157,500 in net income and the expansion will yield $78,750 in additional income before any interest expense. The company has three options: (1) Do not expand, (2) Expand and issue $180,000 in debt that requires 9% annual interest, or (3) Expand and raise $180,000 from equity financing. Required For each of the three options,compute (a) net income and (b) return on equity (Net Income/Equity). Ignore any income tax effects (Round "Return on equity" to 1 decimal place.) 2 Equity Don't Expand Debt Financing Financin Income before interest expense Interest expense Net income Equity Return on equity

Please find my answer in the explanation section below:

Explanation:

Don’t expand Debt Financing Equity Financing

                                                 $             $                $

Income before interest expense 112,500 168,750 168,750

Interset expense                              0      16200     0

Net income                                112,500 152,550 168,750

Equity                                       450000 450000 630000

Return on equity(Net income/Equity) 25%      34%     27%