CM Corporation (CMC) was founded in 2000 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. In January 2012, CMC hired you as an accounting intern.

CM is looking to expand and will require additional funding for this proposed expansion. The management team has determined that $500,000 will cover the building addition and territory expansion costs. As the accountant, your responsibility is to determine what type of long-term obligations the company should review and decide on.

Action

Explain in a memorandum to Conner and Martin the effect on the company to either use the company's free cash reserves or issue bonds for a 10 year period at 10 percent. The bonds will be issued at par; no discount or premium will be needed, as the market rate is also 10 percent.