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%