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The Components of Matlock Ltd's Capital Structure and Their Related

question 50

Essay

The components of Matlock Ltd's capital structure and their related costs are as follows: $\begin{array}{lr}\text { Current liabilities } & \$ 200,000 \\\text { Long-term liabilities } & \$ 800,000^{1} \\\text { Preferred shares } & \$ 250,000^{2} \\\text { Common shares } & \$ 250,000^{3} \\\text { Retained earnings } & \$ 472,500 \\\text { Net income } & \$ 72,500\end{array}$
${ }^{1} \$ 64,000$ interest paid
$2 \$ 12,500$ dividends paid
${ }^{3} \$ 2,500$ dividends paid Matlock's corporate tax rate was 25%.Matlock has $250,000 on hand in cash and cash equivalents and is trying to decide whether to pay off $250,000 of debt or redeem the preferred shares.
Required:
A) What is Matlock's current return on equity?
B) What would be the effect on net income of retiring the debt? What would be their new return on equity?
C) What would be the effect on net income of redeeming the preferred shares? What would be their new return on equity?
D) Are there any other factors that would influence your decision?
E) Which of the two actions do you recommend to management? Support your answer.

Definitions:

Primary Intersubjectivity

The early development phase where infants engage in face-to-face interaction, developing a sense of shared understanding and emotional exchange with caregivers.

External Stimulation

Refers to sensory, cognitive, or emotional input from the environment that can influence an individual's psychological or physiological state.

Cognitive Aspect

Pertains to the mental processes involved in gaining knowledge and comprehension, including thinking, knowing, remembering, judging, and problem-solving.

Rapid Heartbeat

An increased heart rate that can occur due to various factors such as exercise, stress, or medical conditions.