E15-19B (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Istar Company and Honey Dew Inc. Each has assets totaling $1,000,000. Istar Co. Honey Dew, Inc. Current liabili

E15-19B (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Istar Company and Honey Dew Inc. Each has assets totaling $1,000,00

                        Istar Co.                                                  Honey Dew, Inc.                    

Current liabilities            $ 100,000                   Current liabilities                 $ 100,000

Long-term debt, 10%       400,000

Common stock ($10 par) 200,000                   Common stock ($10 par)        600,000

Retained earnings (Cash Retained earnings (Cash

dividends, $48,000)         300,000                  dividends, $60,000)                 300,000

                                    $1,000,000                                                             $1,000,000

For the year, each company has earned the same income before interest and taxes.

                                                              Istar Co.                    Honey Dew, Inc.

Income before interest and taxes       $200,000                           $200,000

Interest expense                                     40,000                                –0–     

                                                              160,000                             200,000

Income taxes (40%)                                64,000                               80,000

Net income                                            $ 96,000                           $120,000

At year end, the market price of Istar‘s stock was $15 per share, and Honey Dew’s was $11 per share.

Instructions

(a) Which company is more profitable in terms of return on total assets?

(b) Which company is more profitable in terms of return on stockholders’ equity?

(c) Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.

(d) From the point of view of net income, is it advantageous to the stockholders of Istar Co. to have the long-term debt outstanding? Why?

(e) What is the book value per share for each company?