Financing business expansion You hold a 30% common stock interest in the family-owned business, a vending machine company. Your sister, who is the manager, has proposed an expansion of plant facilities al an expected cost of $6,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows: Plan 1, Issue $6,000,000 of 15-year. 8% notes at face amount. Plan 2. Issue an additional 100.000 shares of $20 par common stock at $25 per share, and $3,500,000 of 15-year. 8% notes at face amount. The balance sheet as of the end of the previous fiscal year is as follows: Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from $900,000 in the previous year to $1,200,000 for this year. Your sister has asked you. as the company treasurer, to prepare an analysis of each financing plan. a. Discuss the factors that should be considered in evaluating the two plans. b. Which plan offers the greater benefit to the present stockholders? Give reasons for your opinion.

BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883
BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

Solutions

Chapter
Section
Chapter 8, Problem 8.5.2C
Textbook Problem

Financing business expansion
You hold a 30% common stock interest in the family-owned business, a vending machine company. Your sister, who is the manager, has proposed an expansion of plant facilities al an expected cost of $6,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows:

Plan 1, Issue $6,000,000 of 15-year. 8% notes at face amount.
Plan 2. Issue an additional 100.000 shares of $20 par common stock at $25 per share, and $3,500,000 of 15-year. 8% notes at face amount.
The balance sheet as of the end of the previous fiscal year is as follows:

Chapter 8, Problem 8.5.2C, Financing business expansion You hold a 30% common stock interest in the family-owned business, a
Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from $900,000 in the previous year to $1,200,000 for this year. Your sister has asked you. as the company treasurer, to prepare an analysis of each financing plan.
a. Discuss the factors that should be considered in evaluating the two plans.
b. Which plan offers the greater benefit to the present stockholders? Give reasons for your opinion.

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Chapter 8 Solutions

Survey of Accounting (Accounting I)
Ch. 8 - A corporation issues $40,000,000 of 6% bonds to...Ch. 8 - The following data relate to an $8,000,000,7% bond...Ch. 8 - When should the liability associated with a...Ch. 8 - Deere & Company (DE), a company well known for...Ch. 8 - Delta Air Lines (DAL)' SkyMiles program allows...Ch. 8 - Of two corporations organized at approximately the...Ch. 8 - When a corporation issues stock at a premium, is...Ch. 8 - a. In what respect does treasury stock differ from...Ch. 8 - A corporation reacquires 18,000 shares of its Own...Ch. 8 - The treasury stock in Question 14 is resold for...Ch. 8 - A corporation with preferred stock and common...Ch. 8 - An owner of 300 shares of Colorado Spring Company...Ch. 8 - What is the primary purpose of a Mock split?Ch. 8 - Effect of financing on earnings per share BSF Co.....Ch. 8 - Evaluate alternative financing plans Obj. 1 Based...Ch. 8 - Current liabilities Zahn Inc. -told 16.000annual...Ch. 8 - Notes payable Obj. A business issued a 90-day. 7%...Ch. 8 - Compute payroll An employee earns $28 per hour and...Ch. 8 - Summary payroll data In the (blowing summary of...Ch. 8 - Recording payroll taxes According to a summary of...Ch. 8 - Accrued vacation pay ProTech Inc. provides its...Ch. 8 - Bond price CVS Caremark Corp. (CVS) 5-3% bonds due...Ch. 8 - Issuing bonds Cyber Tech Inc. produces and...Ch. 8 - Accrued product warranty Back in Time Inc....Ch. 8 - Accrued product warranty Ford Motor Company (F)...Ch. 8 - Contingent liabilities Several months ago....Ch. 8 - Contingent liabilities The following nole...Ch. 8 - Issuing par stock On January 29. Quality Marble...Ch. 8 - Issuing stock for assets other than cash Obj.5 On...Ch. 8 - Treasury stock transactions Obj.5 Blue Moon Water...Ch. 8 - Treasury stock transactions Sun Dance Gardens Inc....Ch. 8 - Treasury stock transactions Banff Water Inc....Ch. 8 - Cash dividends The date of declaration, date of...Ch. 8 - Effect of cash dividend, stock split, and stock...Ch. 8 - Effect of stock split Audrey's Restaurant...Ch. 8 - Stockholders' Equity section of balance sheet Obj....Ch. 8 - Stockholders' Equity section of balance sheet...Ch. 8 - Effect of financing on earnings per share Three...Ch. 8 - Effect of financing on earnings per share Three...Ch. 8 - Effect of financing on earnings per share Three...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Bond premium; bonds payable transactions Beaufort...Ch. 8 - Bond premium; bonds payable transactions Beaufort...Ch. 8 - Bond premium; bonds payable transactions Beaufort...Ch. 8 - Bond premium; bonds payable transactions Beaufort...Ch. 8 - Stock transactions for corporate expansion Vaga...Ch. 8 - Dividends on preferred and common stock Yukon Bike...Ch. 8 - Dividends on preferred and common stock Yukon Bike...Ch. 8 - Dividends on preferred and common stock Yukon Bike...Ch. 8 - Notes payable transactions Using the data from...Ch. 8 - Notes payable transactions Using the data from...Ch. 8 - Recording payroll and payroll taxes Using the data...Ch. 8 - Recording payroll and payroll taxes Using the data...Ch. 8 - Recording payroll and payroll taxes Using the data...Ch. 8 - Bonds payable transactions I sing the data from...Ch. 8 - Bonds payable transactions I sing the data from...Ch. 8 - Bonds payable transactions Using the data (rum...Ch. 8 - Note payable and stock transactions Using the data...Ch. 8 - Note payable and stock transactions Using the data...Ch. 8 - Note payable and stock transactions Using the data...Ch. 8 - Dividends Using the data from £8.20, indicate the...Ch. 8 - Dividends Using the data from £8.20, indicate the...Ch. 8 - Dividends Using the data from £8.20, indicate the...Ch. 8 - Stock split Using the data from E8-22. indicate...Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios The Home Depot....Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Debt and price-earnings ratios For each of the...Ch. 8 - Ethics and professional conduct in business Jas...Ch. 8 - Ethics and professional conduct in business Jas...Ch. 8 - Contingent liabilities Altria Group. Inc., has a...Ch. 8 - Contingent liabilities Altria Group. Inc., has a...Ch. 8 - Issuing stock Sahara Unlimited Inc. began...Ch. 8 - Issuing stock Sahara Unlimited Inc. began...Ch. 8 - Preferred stock vs. bonds Living Smart Inc. has...Ch. 8 - Financing business expansion You hold a 30% common...Ch. 8 - Financing business expansion You hold a 30% common...

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