Question

Broad Ridge Corporation has the following capital structure at present.

Sources
Current Liabilities	$48,000
Long-Term loans	$200,000
Common Stock (1$ par)	$50,000
Retained Earnings	$165,000
Stockholders Equity and Liabilities	$463,000

The firm needs additional funds of $175,000 to finance an expansion plan. It is evaluating raising this capital using any one of the following options.

1. Issue common stock at a price of $35 each
2. Issue preferred stock of $200 at par each with a dividend rate of 8%.
3. Issue 10-year bonds of $10,000 at par each with an interest rate of 8%,

Required: Discuss the impact of each of these options on the capital structure of the company

Answer 1

ANSWER
Sources	Amount
Current Liabilities	$48,000
Long-Term loans	$200,000
Common Stock (1$ par)	$50,000
Retained Earnings	$165,000
Stockholders Equity and Liabilities	$463,000
a) Effect of issue of equity shares
In the case of equity share issuing, Company stake will be diluted.
But in that case company is in the benefit that it is no obligation
to pay to the shareholder in the event of not sufficient income
in any year.
B) Effect of issuing of preference shares
In case of issuing of preferential shares, Company have to pay
8% on the amount borrowed. This is not the best case because
amount paid to preference share holder is not tax deductible
and even the debenture holder is taking 8% but this expense
is tax deductible for the company
C) Effect of issuing Debentures
In the case of issuing of debentures, Company is liable to
pay timely interset to its debenture holder. Company also
need to consider covenants that was made at the time of
issue of debentures. Sometimes in the year of bad earning
it is heavy to pay interest and company can be bankrupt in
the case of not paying amount in a timely manner
But the advantage is company is divulging its stakes of the
company. So when company will grow in future, they have
all the rights to get the amount from higher share price

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Thanks & Regards,

Devendra agarwal