A company having total assets of S2,350,000 and liabilities of $950,000 needed to raise 1,000000 to purchase some land for expansion. They could either borrow tihe funds using 20 year bonds or they could issue 100,000 shares of common stock at the estimated market price of s10 per share.
A. What is the debt/equity ratio before any choices are made?
B. What is the debt/equity ratio if the $1 million is borrowed using bonds?
C.
1. Which method would you choose to raise the $1 million dollars and why? Use the debt/equity results in your answer.
2. Explain how the bond interest would affect the companies cash flow if they chose that method.