JJ is in need of raising money to expand the company and has identified the methods that he is considering. Using the information provided, calculate any burden to the corporation and provide recommendations to JJ concerning his options.
JumpinJehosaPhats was incorporated on January 1, 2012 and a year later it needs $10,000,000 to expand operations. JJ Phats is the sole shareholder of the corporation.
The corporation is considering three methods to raise the capital:
- issuing common shares at FMV
- issuing preferred stock with par = $1000
- issuing 10 year bonds with par = $1000
You have been hired to determine the best way for the company to obtain the funds needed which might be a single method or combination of methods. Using the following information, discuss the pros and cons of each method and provide necessary calculations to support the position you recommend.
- The company is authorized to issue 1,000,000 shares with a par value of $1.00
- On January 1, 2013 an appraisal of the company indicates that it has a current value of $25,000,000.
- On January 1, 2013 current interest rates are 3.5% APR and rising.
- On December 1, 2012 the competition (LeapinLizards Inc) issued 10,000 ten year cumulative preferred shares with par = $1000 at 3.4%