Response to the following problem:
Two business are considering how to raise $10 million.
Jefferson Corporation is having its best year since it began operations in 1980. For each of the past 10 years, earnings per share have increased by at least 15%. The outlook for the future is equally bright, with new markets opening up and competitors unable to manufacture products of Jefferson's quality. Jefferson Corporation is planning a large-scale expansion.
Madison Company has fallen on hard times. Net income has been flat for the last six years, with this year falling by 10% from last year's level of profits. Top management has experienced turnover, and the company lacks leadership. To become competitive again, Madison Company desperately needs $10 million for expansion.
Required:
1. Propose a plan for each company to raise the needed cash. Which company should borrow? Which company should issue stock? Consider the advantages and the disadvantages of raising money by borrowing and by issuing stock, and discuss them in your answer.
Use the following memorandum headings to report your plans for the two companies:
• Plan for Madison Company to raise $10 million
• Plan for Jefferson Corporation to raise $10 million
2. How will what you learned in this problem help you manage a business?