Question: Chieftain International, Inc., is an oil and natural gas exploration and production company. A recent balance sheet reported $208 million in assets with only $4.6 million in liabilities, all of which were short-term accounts payable. During the year, Chieftain expanded its holdings of oil and gas rights, drilled 37 new wells, and invested in expensive 3-D seismic technology. The company generated $19 million cash from operating activities and paid no dividends. It had a cash balance of $102 million at the end of the year.
Instructions: (a) Name at least two advantages to Chieftain from having no long-term debt. Can you think of disadvantages?
(b) What are some of the advantages to Chieftain from having this large a cash balance? What is a disadvantage?
(c) Why do you suppose Chieftain has the $4.6 million balance in accounts payable, since it appears that it could have made all its purchases for cash?