Consider the following balance sheet of market values of ABC Co.

Between shareholders, creditors, and any other third party (you determine who) who gains and who losses from the following maneuvers?

1. ABC scrapes up GHC 5 in cash and pays a cash dividend.
2. ABC halts operations, sells its fixed assets, and converts net working capital into GHC 200 cash. Unfortunately the fixed assets fetch only GHC 60 on the second-hand market. The GHC 260 cash is invested in Treasury bills.
3. Suppose that a new project has NPV = +GHC 20 and is financed by an issue of preferred stock by ABC.
4. The lenders agree to extend the maturity of their loan from 1 year to 2 in order to give Circular a chance to recover.
    

Transcribed Image Text:

Net working capital Fixed assets Total assets GHC 200 100 GHC 300 Bonds outstanding GHC 250 Common stock 50 Total Liabilities GHC 300 Net working capital Fixed assets Total assets GHC 200 100 GHC 300 Bonds outstanding GHC 250 Common stock 50 Total Liabilities GHC 300

Answer rating: 100% (QA)

ABC scrapes up GHC 5 in cash and pays a cash dividend The shareholders of ABC Co gain from the cash dividend while the companys creditors lose out on the cash that could have been used to pay down deb... View the full answer