Question: Atom Chemical Corporation plans to build or lease a new

Atom Chemical Corporation plans to build or lease a new plant that will produce liquid fertilizer for the agricultural market. The plant is expected to cost $800,000,000 and will be located in the southwestern United States. The company’s chief financial officer, Megan Russ, has spent the last several weeks studying different means of financing the plant, which is expected to cost $800,000,000. After talking with bankers and other financiers, she has decided that there are two basic choices: the plant can be financed through the issuance of a long-term bond or through a long-term lease. Details for the two options are as follows:
1. Issue $800,000,000 of 25-year, 16 percent bonds secured by the new plant. Interest on the bonds would be payable semiannually.
2. Sign a 25-year lease for an existing plant that calls for lease payments of $65,400,000 on a semiannual basis.
Russ wants to know what effect each choice would have on the company’s financial statements. She estimates that the useful life of the plant is 25 years, at which time the plant is expected to have an estimated residual value of $80,000,000.
Russ is planning a meeting to discuss the alternatives. Write a short memorandum to her identifying the issues that should be considered at this meeting.

Sale on SolutionInn
  • CreatedSeptember 10, 2014
  • Files Included
Post your question