Overview
To obtain large amounts of long-term capital, corporate management has to decide whether to issue additional common stock (equity financing), bonds or notes (debt financing), or a combination of the two. This decision is important to both the company and to investors and creditors. The capital structure of a company provides clues as to the potential profit that can be achieved and the risks taken by the company. The following case illustrates a company needing to decide whether to issue bonds or additional shares of their common stock.
XYZ Electronics is considering two plans for raising $2,000,000 to expand operations. Plan A is to issue 7% bonds payable, and plan B is to issue 200,000 shares of common stock. Before any new financing, XYZ Electronics has net income of $200,000 and 100,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $400,000 before interest and taxes. The income tax rate is 21%.
Requirements: In this discussion, write a memo to your professor that addresses the following bullet points. Your memo should have a title, i.e., Memo or Memorandum, then To:, From:, Date:, and Subject lines.
- Discuss the advantages and disadvantages of issuing bonds over issuing capital stock. You need to cite your source(s) at the bottom of post. Please do not copy and paste from your source, but write your memo using your own words.
- Analyze the information in the case scenario above. Use F:12-6 in the textbook as a guide. Then write a paragraph explaining what you saw in your analysis and which plan will result in the higher earnings per share. You need to provide sufficient detail to support your conclusion.
Submit your memo then, read two other student memos and respond to their memos. Do you agree with their position or not. State your reason(s) why and support your position. It is not enough to say, “Hi, I read you memo and I agree with what you said.” Why do you agree? Did they come to same conclusion. Your responses to each student must be a minimum of one complete paragraph.
There is no minimum word-count, but your initial post should be at least one paragraph for each of the bullet points on the memo.