Investors generally finance their investment opportunities (assets) with a combination of loans (debt) and equity shareholders....

 

Transcribed Image Text:

Investors generally finance their investment opportunities (assets) with a combination of loans (debt) and equity shareholders. Suppose owner Alex, as a CEO, purchases an asset (e., property real estate) expected to go up in value. Instead of paying full price, Alex finances the asset with a loan from Carter Bank and with cash from two college friends, Sam and Chris. Sam wants to invest without having to worry about daily operations and is happy to be a preferred shareholder (PS) with no voting rights. Chris has some experience managing property investments and wants to invest as a common shareholder (CS), thus having a voting right or influence over Alex's decisions. Should the investment underperform and the business goes bankrupt, any leftover proceeds would first go to repay creditors (lenders), followed by preferred shareholders, and then common shareholders. a. Sketch Alex's financial balance sheet (T-account), consisting of a $1,000 asset, a $500 loan from Carter Bank, $100 equity from Sam, and $200 in equity from Chris. Assume Alex also invests $200. b. Draw a profit & loss diagram representing the long asset risk position of the CSs (i.e., Alex and business partner Chris), labeling the vertical axis. Do the CSs have limited or unlimited profit potential? Investors generally finance their investment opportunities (assets) with a combination of loans (debt) and equity shareholders. Suppose owner Alex, as a CEO, purchases an asset (e., property real estate) expected to go up in value. Instead of paying full price, Alex finances the asset with a loan from Carter Bank and with cash from two college friends, Sam and Chris. Sam wants to invest without having to worry about daily operations and is happy to be a preferred shareholder (PS) with no voting rights. Chris has some experience managing property investments and wants to invest as a common shareholder (CS), thus having a voting right or influence over Alex's decisions. Should the investment underperform and the business goes bankrupt, any leftover proceeds would first go to repay creditors (lenders), followed by preferred shareholders, and then common shareholders. a. Sketch Alex's financial balance sheet (T-account), consisting of a $1,000 asset, a $500 loan from Carter Bank, $100 equity from Sam, and $200 in equity from Chris. Assume Alex also invests $200. b. Draw a profit & loss diagram representing the long asset risk position of the CSs (i.e., Alex and business partner Chris), labeling the vertical axis. Do the CSs have limited or unlimited profit potential?

Answer rating: 100% (QA)

Stepbystep explanation How to Invest in a Bankrupt Company Risks of Investing in Bankruptcies The Bottom Line Bankruptcythe felony procedure for groups or people after they can not pay their money owe... View the full answer