Shake Shack, Inc. began operations in 2014, and it incorporated in Delaware in Year 1. In February, 2015 it went public with its initial public offering of common stock. By December 31, 2017 it was operating 159 restaurants. At the end of 2017, it had total assets of $470.6 million, long-term debt of $212.1 million, and total liabilities of $246.1 million. Shake Shack’s income before interest and taxes in 2017 was $33.8 million. Its average interest rate on long-term debt was less than 1.0 percent.
Required
a. Assuming Shake Shack incurs interest expense mostly on its long-term debt, how much interest did the company incur in 2017, assuming the average interest rate remains at 1.0 percent?
b. Does the debt seem excessive compared with the amount of 2017 net income before interest and taxes? Explain.
c. Assuming Shake Shack pays tax at the rate of 25 percent, what amount of tax will the company pay in 2017?
d. Assume you are the president of the company. Write a memo to the shareholders explaining why Shake Shack would want to finance so much of its assets with debt rather than stockholders’ equity.
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