Outright Purchase of Smithton Stock: Case Study Questions
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1. Outright purchase of Smithon stock:
a. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company--would that raise debt to equity issues?
The Question here is that whether Mr. Jones should purchase the Stock outright or Mr. Smith, leaving Smithon intact. As per the analysis of the case Smithon is a very profitable company as a whole and would surely provide huge benefits to Mr. Jones if he buys that. But in a reverse manner it would result in a heavy loss to Smithon may be for 2-3 years because of the huge investment of money. But, after some years, i.e. in long run it would provide huge benefits to Mr. Jones, so Mr. Jones should purchase the stock of Smith Outright.
Mr. Jones should make an adjustment that it should issue the equity shares from Johnson Services to Smithson's Shareholders in the exchange of shares, resulting in the acquiring the shares of Smithon. This would widely offset the Smithson's profits with the losses of Johnson. Thus, the debts should be issued in Johnson to pay for Smith. The debt equity issues would possibly arise which would show that the company is aggressive in issuing debt. But now if large amount of debt is raised then it might get over the required rate of return leading the company to be bankrupt.
============================================================================= b. Should Mr. Jones convert Smithon to an