hhtoplll
Apr 30, 2012, 08:52 AM
WILLIAMS CORPORATION
Balance Sheet
December 31, 2012
Assets
Cash $100,000
Accounts receivable 250,000
Inventory 750,000
Property, plant & equipment (net) 860,000
Total assets $1,960,000
Liabilities
Accounts payable $100,000
Accrued liabilities 260,000
Notes payable 290,000
Total liabilities $650,000
Stockholders' equity
Common stock, $5 par $700,000
Paid-in capital in excess of par 300,000
Retained earnings 310,000
Total stockholders' equity 1,310,000
Total Liabilities and equity $1,960,000
Williams' business is growing rapidly, and the company needs to expand its manufacturing facilities. This expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring five alternatives to obtain the necessary capital:
DEBT OPTION:
Williams is able to issue 5-year bonds for the full amount needed. The interest rate on these bonds would be 7%. The market rate of interest is also 7%.
COMMON STOCK OPTION:
Williams has identified an investor who is willing to pay $1,000,000 for 40,000 newly issued common shares. Common shares have been paying a dividend of $0.50 per share. Williams anticipates that this dividend rate will be maintained.
NONCUMULATIVE PREFERRED STOCK OPTION:
Williams has identified a hedge fund that will pay $1,000,000 for 8% noncumulative preferred stock to be issued at par.
CUMULATIVE PREFERRED STOCK OPTION:
Williams has identified an insurance company that will pay $1,000,000 for 6% cumulative preferred stock to be issued at par.
(a) Prepare the revised balance sheets that would result under each of the alternative financing scenarios.
(b) Which of the alternative financing scenarios involve fixed committed payments to investors, and which involve discretionary payments?
(c) Which one of the scenarios involves the least ownership dilution for existing shareholders?
(d) Why might the preferred share alternatives involve different yields?
(e) Evaluate the balance sheets prepared in part (a). Which appear similar? Given that certain balance sheets appear similar, yet the fundamental economic positions vary, what is to be learned about carefully examining financial statements and notes?
Balance Sheet
December 31, 2012
Assets
Cash $100,000
Accounts receivable 250,000
Inventory 750,000
Property, plant & equipment (net) 860,000
Total assets $1,960,000
Liabilities
Accounts payable $100,000
Accrued liabilities 260,000
Notes payable 290,000
Total liabilities $650,000
Stockholders' equity
Common stock, $5 par $700,000
Paid-in capital in excess of par 300,000
Retained earnings 310,000
Total stockholders' equity 1,310,000
Total Liabilities and equity $1,960,000
Williams' business is growing rapidly, and the company needs to expand its manufacturing facilities. This expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring five alternatives to obtain the necessary capital:
DEBT OPTION:
Williams is able to issue 5-year bonds for the full amount needed. The interest rate on these bonds would be 7%. The market rate of interest is also 7%.
COMMON STOCK OPTION:
Williams has identified an investor who is willing to pay $1,000,000 for 40,000 newly issued common shares. Common shares have been paying a dividend of $0.50 per share. Williams anticipates that this dividend rate will be maintained.
NONCUMULATIVE PREFERRED STOCK OPTION:
Williams has identified a hedge fund that will pay $1,000,000 for 8% noncumulative preferred stock to be issued at par.
CUMULATIVE PREFERRED STOCK OPTION:
Williams has identified an insurance company that will pay $1,000,000 for 6% cumulative preferred stock to be issued at par.
(a) Prepare the revised balance sheets that would result under each of the alternative financing scenarios.
(b) Which of the alternative financing scenarios involve fixed committed payments to investors, and which involve discretionary payments?
(c) Which one of the scenarios involves the least ownership dilution for existing shareholders?
(d) Why might the preferred share alternatives involve different yields?
(e) Evaluate the balance sheets prepared in part (a). Which appear similar? Given that certain balance sheets appear similar, yet the fundamental economic positions vary, what is to be learned about carefully examining financial statements and notes?