Moon Corporation and Star Corporation are in the same line of business and both were
Moon Corporation and Star Corporation are in the same line of business and both were recently organized, so it may be assumed that the recorded costs for assets are close to current market values. The balance sheets for the two companies are as follows at July 31, 2009:
MOON CORPORATION
Balance Sheet
July 31, 2009
Assets Liabilities & Owners Equity
Cash
.$ 18,000
Accounts Receivable
... 26,000
Land
.
37,200
Building
. 38,000
Office Equipment
. 1,200
Total
$120,400 Liabilities
Notes Payable(due in 60days)
.. $ 12,400
Accounts Payable
.. 9,600
Total Liabilities
.. $22,000
Owners Equity
Capital Stock
$ 60,000
Retained Earnings
... 38,400 98,400
Total
. $120,400
STAR CORPORATION
Balance Sheet
July 31, 2009
Assets Liabilities & Owners Equity
Cash
... $ 4,800
Accounts Receivable
... 9,600
Land
.
.. 96,000
Building
... 60,000
Office Equipment
... 12,000
Total
.$182,400 Liabilities
Notes Payable (due in 60 days)
$22,400
Accounts Payable
... 43,200
Total Liabilities
... $65,600
Owners Equity
Capital Stock
$72,000
Retained Earnings
44,800
116,800
Total
$182,400
Instructions
a. Assume that you are a banker and that each company has applied to you for a 90-day loan of $12,000. Which company would you consider to be the more favorable prospect ? Explain your answer in a short paragraph.
b. Assume that you are an investor considering purchasing all the capital stock of one or both of the companies. For which companys capital stocks would you be willing to pay the higher price? Do you see any indication of a financial crisis that you might face shortly after buying the capital stocks of either company? Explain your answer in a short paragraph.
