Corporation a Decides to Borrow $1,000,000 and Use the Money

question 44

Multiple Choice

Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock.The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased.Therefore,

• A) Corporation A's operating income will decrease due to higher interest expense.
• B) Corporation A's net income will increase due to the tax deductibility of interest expense.
• C) Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment.
• D) Corporation A's gross profit will decrease.

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Definitions:

Financial Statements

Reports that summarize the financial performance, position, and cash flows of a business over a specific period of time.

Endowment Contribution

A donation made to an institution or organization with the stipulation that it be invested and the principal remain intact, while the investment income can be used for organizational purposes.

Restricted Contribution

Funds given to an organization with stipulations on their usage, requiring the funds to be spent in certain ways or restricted to specific purposes.

Unrestricted Contribution

refers to donations or contributions made to a non-profit organization without any conditions, allowing the organization to use the funds wherever they are most needed.