After you finish your discussion with the managers and finance personnel, the head of strategic planning stops by your office to discuss the IPO. He says that recently the investment bankers started to encourage the firm to begin to use more financial leverage as a sign to Wall Street that the company would be more aggressive when it goes public. The investment bankers believe this will help with the IPO and likely generate millions of dollars in additional net proceeds. You two sit at the large conference table in your office discussing what the impact would be if the company purchased the production plant rather than leased it and if the company used debt rather than cash flow to finance the project (the company would also use debt to buy the facility).
With this in mind, discuss with the head of strategic planning how using more debt can impact a firm's capital structure. Discuss the trade-offs between incremental IPO proceeds and debt financing. How would the company's balance sheet be impacted by debt financing rather than using cash? How would the company's return on equity be impacted by utilizing more debt?© BrainMass Inc. brainmass.com October 17, 2018, 12:03 am ad1c9bdddf
The financing decision is considered to be an important factor for the firm's profitability. The decision involves the various sources available and using them as a source for the capital structure of the firm. Before starting a paper like this, it is crucial to focus upon the sources individually and their favorability towards the firm. This decision holds importance as it is directly related with the firm's prosperity.
The paper discusses the concept of IPO and the use of debt financing before starting a project. The decision made in this area requires precision as it is related to the project's success. The point to be discussed is what type of source the firm adopts to initiate the project. That means whether it should be debt financing, or the capital invested by the investors or the public financing. The decision varies from person to person and it is required on the part of the decision maker to put his efforts in making it worthy.
In addition to this, some of the companies believe to allocate more funds from the investors instead of going for public financing. On the other hand, some believe in raising more funds from the public instead of getting it invested from the investors. That is why, both of them are considered to be fruitful; though they involve certain disadvantages too. The most important point is that the matter is to allocate the funds properly ...
The response looks at the pros and cons of this financial decision in 942 words with references.
Liabilities, Debt and Equity Financing and Stock vs. Cash Dividends
Chapter 10: Questions 1, 7, 8, and 19
1. 1. Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia
2. 7. (a) What are long-term liabilities? Give two examples.
(b) What is a bond?
3. 8. Contrast these types of bonds:
(a) Secured and unsecured.
(b) Convertible and callable.
5. 19. Valentin Zukovsky says that liquidity and solvency are the same thing. Is he correct? If not, how
do they differ?
Chapter 10: BE 10-1
6. BE 10-1. Kananga Company has these obligations at December 31: (a) a note payable
for $100,000 due in 2 years, (b) a 10-year mortgage payable of $200,000 payable in ten $20,000 annual payments, (c) interest payable of $15,000 on the mortgage, and (d) accounts payable of $60,000. For each obligation, indicate whether it should be classified as a current liability.
Chapter 11: BYP11-10
7. BYP11-10. Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the president, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood's financial vice-president, Vicki Lemke, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. "Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend," he orders. "Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens."
(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about president Mailor's intentions or actions?
(c) What is the effect of a stock dividend on a corporation's stockholders' equity accounts?
Which would you rather receive as a stockholder: a cash dividend or a stock dividend? Why?
Chapter 11: Assignment 11-1
8. PROBLEM 11.1
Early in 2002, Robbinsville Press was organized with authorization to issue 100,000 shares of $100 par value preferred stock and 500,000 shares of $1 par value common stock. Ten thousand shares of the preferred stock were issued at par, and 170,000 shares of common stock were sold for $15 per share. The preferred stock pays an 8 percent cumulative dividend.
During the first four years of operations (2002 through 2005), the corporation earned a total of $1,085,000 and paid dividends of 75 cents per share in each year on its outstanding common stock.
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2005. Include a supporting schedule showing your computation of the amount of retained earnings reported. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Are there any dividends in arrears on the company's preferred stock at December 31, 2005?
Explain your answer.