Chapter 2: Q25BP-d (page 152)

The Lopez-Portillo Company has \(10.6 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 9 percent and the par value of the stock is \)10 per share. President Lopez-Portillo is considering two financing plans for an expansion to \(18 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt
will cost a whopping 12 percent! Under Plan B, only new common stock at \)10
per share will be issued. The tax rate is 40 percent.
d. Explain why corporate financial officers are concerned about their stock
values.

Short Answer

Expert verified

The company’s stock price shows the investor's perception of its ability to earn and grow its profit in the future. The company's stock price shows the wealth of the shareholders; hence, the corporate financial officers are concerned about their stock values.

Step by step solution

Stock value

Stock value means the market value of the share held by the investors. It is the value at which the share can be sold or bought in the open market.

Importance of stock value for investors

Financial officers invest in the stock or shares to increase their wealth. And the wealth is increased when the value of the stocks held by the financial officer increases in the market. Hence, the financial officers are concerned with the stock values.

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Selling and administrative expenses	$112,000
Depreciation expenses	73,000
Sales	489,000
Interest expenses	45,000
Cost of goods sold	156,000
Taxes	47,000

Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

Retained earning	Bond payable
Accounts payable	Accrued wages payable
Prepaid expenses	Accounts receivable
Plant and equipment	Capital in excess of par
Inventory	Preferred stock
Common stock	Marketable security

Short Answer

Step by step solution

Stock value

Importance of stock value for investors

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