SELLING COMMON STOCK WITH A PUT. Isaacson Corporation needs to raise $15 million to expand its operations into Florida and Georgia. Isaacson considered acquiring the $15 million by selling long-term bonds, but the firm’s existing agreement with its creditors requires the firm to pay off all $20 million existing long-term debt before additional debt is sold. Isaacson also considered selling common stock but discovered that 1,500,000 additional common shares would have to be sold to raise the

$15 million. If 1,500,000 shares are sold, then existing shareholders would lose control of the firm to the new owners.

Isaacson’s investment banker analyzed the situation and recommended that the firm sell common stock with a put. These shares could be sold for a much higher price

($50 each) than normal shares ($10 each) because the shareholders can require Isaacson to repurchase the shares after 5 years at 160% of their selling price. Because these shares can be sold for a higher price, the $15 million can be raised by selling only 300,000 shares and control of the company will not pass to the new shareholders.

REQUIRED:

Is stock sold with a put really a sale of equity? (Suggestion: Read paragraphs 28-33 and 43-49 of Statement of Financial Accounting Concepts No. 3.)