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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
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Phoniex University
Oct-2001 - Nov-2016
10.8    LONG-TERM DEBT AS A FLEXIBLE FINANCIAL ACCOUNT. For this exercise, use the preceding data for Schwartz Company. Now assume that Schwartz pays com- mon shareholders a dividend of $25 in Year +1. Also assume that Schwartz uses long-term debt as a flexible financial account, increasing borrowing when it needs capital and paying down debt when it generates excess capital. For simplicity, assume that Schwartz pays 10.0 per- cent interest expense on the ending balance in long-term debt for the year and that interest expense is tax deductible at Schwartz’s average tax rate of 20.0 percent. Present the projected income statement and balance sheet for Year +1. (Hint: Because of the circularity between interest expense, net income, and debt, several iterations may be needed to balance the pro- jected balance sheet and to have the projected balance sheet articulate with net income. You may find it helpful to program a spreadsheet to work the iterative computations.)
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