The Cox Computer Company has grown rapidly during the past Recently, its commercial bank urged the company to consider increasing its per- manent financing. Its bank loan has risen to $150,000 and carries a 10 percent interest rate, and Cox has been 30 to 60 days late in paying its suppliers. Discussions with an investment banker have resulted in the decision to raise $250,000 at this time. Investment bankers have assured Cox that the following alternatives are feasible (issuing costs will be ignored): Charles Cox, the president, owns 80 percent of Cox's common stock and wishes to maintain control of the company; 50,000 shares are outstanding. The following are summaries of Cox's latest financial statements: Balance Sheet Income Statement Total assets $275,000 Sales $550,000 Short-term debt (bank loans, etc.) 175,000 All costs except interest (495,000) Bonds $ 55,000 Earnings before interest and taxes 25,000 Alternative 1-Sell common stock at $10 per share. Common stock, $1 par Retained earnings Total liabilities and equity 50,000 25,000 $275,000 (15,000) $ 40,000 (16,000) $ 24,000 Interest Alternative 2-Sell convertible bonds with a 10 percent coupon, convertible into 80 shares of common stock for each $1,000 bond (i.e., the conversion price is $12.50 per share). Earnings before taxes Taxes at 40% Net income Shares outstanding Earnings per share Market price of stock a. Show the new balance sheet under each alternative. For Alternative 2, show the balance sheet after conversion of the bond into stock. Assume that $150,000 of the funds raised will be used to pay off the bank loan and the rest will be used to increase total assets. b. Show Charles Cox's control position under each alternative, assuming that he does not purchase additional shares. c. What is the effect on earnings per share of each alternative if it is assumed that earnings before interest and taxes will be 20 percent of total assets? (Hint: Earnings per share = (Net income)/(Shares outstanding). d. Which of the three alternatives would you recommend to Charles Cox, and why? 8 Atlantic Coast Resources Company had the following balance sheet 50,000 $0.48 Alternative 3-Sell debentures with a 12 percent coupon; each bond will sell at its face value of $1,000 and will have a maturity of 10 years. $8.64 C. C Wha that C. (Him Whi d. 2014
The Cox Computer Company has grown rapidly during the past Recently, its commercial bank urged the company to consider increasing its per- manent financing. Its bank loan has risen to $150,000 and carries a 10 percent interest rate, and Cox has been 30 to 60 days late in paying its suppliers. Discussions with an investment banker have resulted in the decision to raise $250,000 at this time. Investment bankers have assured Cox that the following alternatives are feasible (issuing costs will be ignored): Charles Cox, the president, owns 80 percent of Cox's common stock and wishes to maintain control of the company; 50,000 shares are outstanding. The following are summaries of Cox's latest financial statements: Balance Sheet Income Statement Total assets $275,000 Sales $550,000 Short-term debt (bank loans, etc.) 175,000 All costs except interest (495,000) Bonds $ 55,000 Earnings before interest and taxes 25,000 Alternative 1-Sell common stock at $10 per share. Common stock, $1 par Retained earnings Total liabilities and equity 50,000 25,000 $275,000 (15,000) $ 40,000 (16,000) $ 24,000 Interest Alternative 2-Sell convertible bonds with a 10 percent coupon, convertible into 80 shares of common stock for each $1,000 bond (i.e., the conversion price is $12.50 per share). Earnings before taxes Taxes at 40% Net income Shares outstanding Earnings per share Market price of stock a. Show the new balance sheet under each alternative. For Alternative 2, show the balance sheet after conversion of the bond into stock. Assume that $150,000 of the funds raised will be used to pay off the bank loan and the rest will be used to increase total assets. b. Show Charles Cox's control position under each alternative, assuming that he does not purchase additional shares. c. What is the effect on earnings per share of each alternative if it is assumed that earnings before interest and taxes will be 20 percent of total assets? (Hint: Earnings per share = (Net income)/(Shares outstanding). d. Which of the three alternatives would you recommend to Charles Cox, and why? 8 Atlantic Coast Resources Company had the following balance sheet 50,000 $0.48 Alternative 3-Sell debentures with a 12 percent coupon; each bond will sell at its face value of $1,000 and will have a maturity of 10 years. $8.64 C. C Wha that C. (Him Whi d. 2014
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
Related questions
Question
Please help me answer Part A-D all of the information is there. Thank You
![The Cox Computer Company has grown rapidly during the past five years.
Recently, its commercial bank urged the company to consider increasing its per-
manent financing. Its bank loan has risen to $150,000 and carries a 10 percent
interest rate, and Cox has been 30 to 60 days late in paying its suppliers.
Discussions with an investment banker have resulted in the decision to raise
Charles Cox, the president, owns 80 percent of Cox's common stock and
wishes to maintain control of the company; 50,000 shares are outstanding. The
following are summaries of Cox's latest financial statements:
Balance Sheet
Income Statement
Total assets
$275,000
Sales
$550,000
$250,000 at this time. Investment bankers have assured Cox that the following
alternatives are feasible (issuing costs will be ignored):
Short-term debt (bank
175,000
All costs except interest
(495,000)
loans, etc.)
$ 55,000
Earnings before
interest and taxes
Bonds
25,000
Alternative 1-Sell common stock at $10 per share.
Common stock, $1 par
Retained earnings
Total liabilities and equity
50,000
Interest
(15,000)
Alternative 2-Sell convertible bonds with a 10 percent coupon, convertible
25,000
Earnings before taxes
$ 40,000
$275,000
Taxes at 40%
into 80 shares of common stock for each $1,000 bond (i.e., the conversion
price is $12.50 per share).
(16,000)
$ 24,000
Net income
Shares outstanding
Earnings per share
Market price of stock
50,000
$ 0.48
$ 8.64
Show the new balance sheet under each alternative. For Alternative 2, show
the balance sheet after conversion of the bond into stock. Assume that
$150,000 of the funds raised will be used to pay off the bank loan and the
Alternative 3-Sell debentures with a 12 percent coupon; each bond will sell at
a.
its face value of $1,000 and will have a maturity of 10 years.
rest will be used to increase total assets.
Show Charles Cox's control position under each alternative, assuming that
Wha
that
[Hin
Whi
he does not purchase additional shares.
What is the effect on earnings per share of each alternative if it is assumed
that carnings before interest and taxes will be 20 percent of total assets?
(Hint: Earnings per share = (Net income)/(Shares outstanding).]
d. Which of the three alternatives would you recommend to Charles Cox, and why?
8 Atlantic Coast Resources Company had the following balance sheet at the end of
C.
2014](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3baadaa5-d07c-46f8-9aba-4157c60e3d77%2F69fbefe9-bcdd-416f-b419-a21b171394ad%2Fc2zrex1a_processed.png&w=3840&q=75)
Transcribed Image Text:The Cox Computer Company has grown rapidly during the past five years.
Recently, its commercial bank urged the company to consider increasing its per-
manent financing. Its bank loan has risen to $150,000 and carries a 10 percent
interest rate, and Cox has been 30 to 60 days late in paying its suppliers.
Discussions with an investment banker have resulted in the decision to raise
Charles Cox, the president, owns 80 percent of Cox's common stock and
wishes to maintain control of the company; 50,000 shares are outstanding. The
following are summaries of Cox's latest financial statements:
Balance Sheet
Income Statement
Total assets
$275,000
Sales
$550,000
$250,000 at this time. Investment bankers have assured Cox that the following
alternatives are feasible (issuing costs will be ignored):
Short-term debt (bank
175,000
All costs except interest
(495,000)
loans, etc.)
$ 55,000
Earnings before
interest and taxes
Bonds
25,000
Alternative 1-Sell common stock at $10 per share.
Common stock, $1 par
Retained earnings
Total liabilities and equity
50,000
Interest
(15,000)
Alternative 2-Sell convertible bonds with a 10 percent coupon, convertible
25,000
Earnings before taxes
$ 40,000
$275,000
Taxes at 40%
into 80 shares of common stock for each $1,000 bond (i.e., the conversion
price is $12.50 per share).
(16,000)
$ 24,000
Net income
Shares outstanding
Earnings per share
Market price of stock
50,000
$ 0.48
$ 8.64
Show the new balance sheet under each alternative. For Alternative 2, show
the balance sheet after conversion of the bond into stock. Assume that
$150,000 of the funds raised will be used to pay off the bank loan and the
Alternative 3-Sell debentures with a 12 percent coupon; each bond will sell at
a.
its face value of $1,000 and will have a maturity of 10 years.
rest will be used to increase total assets.
Show Charles Cox's control position under each alternative, assuming that
Wha
that
[Hin
Whi
he does not purchase additional shares.
What is the effect on earnings per share of each alternative if it is assumed
that carnings before interest and taxes will be 20 percent of total assets?
(Hint: Earnings per share = (Net income)/(Shares outstanding).]
d. Which of the three alternatives would you recommend to Charles Cox, and why?
8 Atlantic Coast Resources Company had the following balance sheet at the end of
C.
2014
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Financial Accounting
Accounting
ISBN:
9781305088436
Author:
Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:
Cengage Learning
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
