The shareholders tentatively plan to distribute only enough cash out of Ladue during the current year to enable them to pay their income tax on corporate income, including the net capital gain attributable to the Benton stock sale. The remainder of the $1,000,000 cash sales proceeds will fund a major expansion of the corporate business. This expansion will require an additional $500,000 of capital, and the shareholders are considering two alternative methods to raise this amount. The first alternative is for Ladue to negotiate a loan with a local bank. The loan will be secured by the preferred stock received in the Benton sale and guaranteed by the shareholders. The second alternative is for Richard Rogers to lend the money to Laude. Richard would take a 10- year note bearing a competitive. fixed interest rate. After four years, the remaining principal balance of the note would be convertible into Ladue common stock at Richards' option. The amount of Ladue stock issued to Richard would be determined by reference to the appraised value of the corporate business at the date of conversion. The expansion presents a relatively high risk business strategy. The shareholders project that the expanded business will operate at a substantial loss for several years. Howe'.er, they also believe that the expansion will guarantee Ladue's domination of both the local and regional markets, and will ultimately create tremendous profitability. All three shareholders have various other sources of income they plan to offset by Ladue's losses.

Answer rating: 100% (QA)

The decision of whether to negotiate a loan with a local bank or have Richard Rogers lend the money ... View the full answer