Question 2. (20 points) Reuth Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 51.5% percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent. Balance sheet information is shown below. The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share. Current Balance Sheet Current Liabilities $900,000 1,000,000 Common Stock, Par $0.25 Retained earnings 700,000 Total Assets $2,600,000 Total claims $2,600,000 Alternative 1: Common stock FACTS Alternative 1: Common stock $10 200,000 Tax rate 20% # new shares # new shares Par value per share $0.25 New financing $2,000,000 Par value per share Existing Loan $600,000 Interest rate Alternative 2: Debentures : Exercise price per warrant $15 Interest amount - old 10% Alternative 2: Debentures $60,000 Exercise price per warrant $200,000 # bonds to raise 2M # bonds to raise new capital 2,000 Interest amount - new # new shares 100,000 # new shares warrants per bond 50 President owns 51.5% warrants per bond New money raised 1,500,000 shares outstanding Addition to par 25,000 4,000,000 New money raised Addition to par Additional paid-in capital Additional paid-in capital 1,475,000 a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants. Question 2. (20 points) Reuth Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 51.5% percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent. Balance sheet information is shown below. The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share. Current Balance Sheet Current Liabilities $900,000 1,000,000 Common Stock, Par $0.25 Retained earnings 700,000 Total Assets $2,600,000 Total claims $2,600,000 Alternative 1: Common stock FACTS Alternative 1: Common stock $10 200,000 Tax rate 20% # new shares # new shares Par value per share $0.25 New financing $2,000,000 Par value per share Existing Loan $600,000 Interest rate Alternative 2: Debentures : Exercise price per warrant $15 Interest amount - old 10% Alternative 2: Debentures $60,000 Exercise price per warrant $200,000 # bonds to raise 2M # bonds to raise new capital 2,000 Interest amount - new # new shares 100,000 # new shares warrants per bond 50 President owns 51.5% warrants per bond New money raised 1,500,000 shares outstanding Addition to par 25,000 4,000,000 New money raised Addition to par Additional paid-in capital Additional paid-in capital 1,475,000 a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants
