Question

The following condensed balance sheet for December 31, 2015, comes from the records of Buzz and Associates:


Buzz and Associates is considering the purchase of a new piece of equipment for $30,000. The company does not have enough cash to purchase it outright, so it is considering alternative ways of financing. As management sees it, there are three basic options: (1) issue 3,000 ownership shares for $10 per share, (2) take out a long-term loan (12 percent annual interest) for $30,000 from the bank, or (3) purchase the equipment on open account (must be paid in full in thirty days). Presently Buzz has 12,000 ownership shares outstanding.

REQUIRED:
a. Compute the present current ratio (current assets/current liabilities), the debt/equity ratio (total liabilities/shareholders’ equity), and the book value of Buzz’s outstanding ownership shares: (total assets minus total liabilities) divided by number of shares outstanding.
b. Compute the current ratio, debt/equity ratio, and book value per share under each of the three financing alternatives, and express your answers in the following format:


c. Discuss some of the pros and cons associated with each of the three financing options.
d. The chairman of the board of directors stated at a recent board meeting that with $50,000 in Retained Earnings, the company should be able to purchase the $30,000 piece of equipment. Comment on the chairman’sstatement.


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  • CreatedAugust 19, 2014
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