Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products. Their Initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 to aquire the initial assets of the company. They have narrowed down the financing mix alternatives to two: 1. All equity financing,

2.$20,000,000 in debt financing and $30,000,000 in equity financing.

No matter which financing alternative is chosen the corporation expects to be able to generate a 10% annual return, before payment of interest and income taxes on the $50,000,000 in assets acquired. The interest rate on debt would be 8%. The effective income tax rate will be approximately 50%.

Alternative 2 will require specified interest and principal payments to be made to the creditors at specfic dates. The Interest portion of these payments (interest expense) will reduce the taxable income of the corporation and hence the amount of income tax the corporation will pay. The all- equity alternative requires no specfied payments to be made to suppliers of capital. The corporation is not legally liable to make distrubutions to its owners. If the board of directors does decide to make a distrubution, it is not an expense of the corporation and does not reduce taxable income and hence the taxes the corporation pays.

Required:

1. Prepare abbreviated income statements that compare first-year profitablity for each of the two alternatives.

2. Which alternative would be expected to achieve the highest first-year profits? Why?

3. Which alternative would provide the highest rate of return on shareholders' equity? Why

4. What other related implications of the decision should be consisdered?

2. the external environment (connect)choose whether each example belongs in the general, task, or internal environment. exampleenvironmenta worldwide recession task environment / general environment / internal environmentlocal mothers asking their community grocery store to carry no-salt cheerios-type cereal for their babies task environment / general environment / internal environmentchoose the phrase that best completes the following sentence. the relationship between the task environment and the general environment is best described as: a one-way system: changes in the task environment affect the general environment, but changes in the general environment do not affect the task environment. an open system: changes in the task environment affect the general environment, and changes in the general environment affect the task environment. a one-way system: changes in the general environment affect the task environment, but changes in the task environment do not affect the general environment. a closed system: changes in the general environment do not affect the task environment, and changes in the task environment do not affect the general environment.©bloomberg via getty imagesmanagement in the newsin april 2010, the explosion of british petroleum’s (bp) deepwater horizon oil drilling rig and the accompanying oil spill dramatically changed the external environment in which all oil companies operate. the explosion released more oil than any other accidental spill in history and had a huge impact on the waters and surrounding communities of the gulf coast. the conditions that led to the spill, the attempts to stop the spill, and the clean-up and aftermath of the spill prompted debates in the u. s. senate, concern on wall street, and attention from companies all over the world. match each oil spill event with a specific dimension of the general environment. eventgeneral environment dimensionbp stock prices falling 25% during the first month after the oil spill oil seeping into pelican nesting grounds, which will place the brown pelican back on the endangered species list people moving from louisiana to oklahoma to avoid the effects of the spill