Question

The CFO of Mulroney Brothers has suggested that the company should issue $300 million worth of common stock and use the proceeds to reduce some of the companys outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The companys tax rate will also remain the same. Which of the following will occur:_____________
a) The company's net income will increase.
b) The company's taxable income will fall.
c) The company will pay less in taxes.
d) The firm's sales will increase
e) All of the above are correct.

Answer 1

Answer: A. The company's net income will increase.

Explanation:

Based on the above scenario, the net income of the company will increase. From the new issue, it should be noted that there will be redemption of debt and therefore, there'll be reduction in the debt which will lead to lower interest expense.

It should be noted that the net income, which is also referred to as the net earnings, is simply the sales minus the cost of goods sold, interest, taxes and the general expenses. Since there's a lower interest expense, there'll be a rise in net income.