As a finance student, you should be able to help Bentley by telling him which companies in Section B should use the financing methods listed in Section A.
Section A Leasing arrangements Long-term bonds Debt with warrants Friends or relatives Common stock: non-rights Preferred stock (nonconvertible) Common stock: rights offering Convertible debentures Factoring
Section B
Boudoir’s Inc. Timberland Power & Light Ripe and Fresh Canning Company Piper Pickle Company Copper Mountain Mining Company Bull Gator Saloon and Dance Hall Golden Gate Aircraft Corporation Schooner Yachts Teller Pen Corporation
Financing Method Company Reasoning
1. Leasing arrangements Boudoir’s Inc. The…show more content… Debt with warrants Copper Mountain Mining Company The company’s debt ratio is still below industry average; hence it still can afford to issue additional debt instruments. Because the company’s stock is already selling within the average range, but well below the upper bound of $13 (EPS of $1 multiplied by 13) a warrant or a right to purchase the company’s stock at the current market price of $11 in the future is attractive.
Friends or relatives Bull Gator Saloon and Dance Hall The proposed business is relatively small and the owner is not an established businessman. Borrowing from friends and relatives is easier for him.
Common stock: nonrights Schooner Yatchs The additional capital requirement is almost 50% of the company’s total assets and given that it is closely held, raising capital from existing stockholders might be very difficult. Hence, issuance of common stock to the public through a nonrights issuance.
Preferred stock (nonconvertible) Piper Pickle Company The company’s debt ratio is almost 70% above industry average, hence issuing additional debt might be very expensive for the company in terms of effective interest rate. An alternative is the issuance of preferred stock – the company’s common stock is already overvalued in the market hence sourcing additional capital through common might result to lower proceeds.
Common stock: rights offering Golden Gate Aircraft Corporation The company’s debt ratio is already more than
