The two quotes below were taken from The Wall Street Journal. A month after he staved offfinancial ruin by getting his bankers to lend him $65 million, Donald Trump is about to ask his casino bondholdersfor a similarfinancialfavor. Mr. Trump and his advisers have tentatively decided to propose to holders of all or part of the $1.3 bil¬ lion in debt to accept equity in his casinos in exchangefor letting him cancel some interest pay¬ ments . . . What ails Mr. Trump’s casinos is .. . his properties are not earning enough cash to pay interest on the debt.” (July 26, 1990) RJR Nabisco Holding Corp. said it raised $1.13 billion by selling 100 million shares at $11.25 each, in the largest equity offering by a U.S. corporation since 1987. The stock offering marks a further step in RJR’s year-long campaign to reduce its debt and increase its equity. The tobacco andfood company has said that proceedsfrom the offering will be used primarily to retire some ofits high-yieldjunk bonds, which [were used to finance a leverage buyout several years earlier and] carry 17 percent interest rates. (April 12, 1991) REQUIRED:

a. These quotes describe equity issuances by Trump Atlantic City Associates and RJR Nabisco. Provide a plausible explanation for why these two entities issued equity and com¬ ment on the situations faced by the two companies.

b. Describe the effects of these transactions on the financial statements of the two entities.

c. Discuss the trade-offs considered by RJR Nabisco’s management when they decided to issue equity and use the proceeds to retire outstanding junk bonds.