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.

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.

  • CreatedAugust 19, 2014
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