Question

Module 2 Case Information  
Zeller & Merkel, Inc. (ZM) is a mid-sized high-tech manufacturing firm that has taken you on as an intern. You are very thankful for this opportunity, especially as Tim Zeller and Christine Merkel are known for giving their interns opportunities to use their accounting knowledge by asking for the student’s evaluation of important scenarios in a live business. A good example is ZM’s current plan to raise money through a stock issue rather than a debt issue. You recall from your Intermediate Accounting class that issuing debt imposes a fixed financial obligation on the company, but does not convey ownership to the debt holders. However, if ZM issues stock, it gives up some ownership and thus some control. You know Zeller and Merkel are protective of the company, and you wonder why they would choose to issue stock. You decide to ask them the next day.

ZM is very receptive of your inquiry, and they invite you to give your evaluation and opinion on the following 5 scenarios they have been considering for raising the necessary money for expansion:

1. Issue $10,000,000 of 10-year bonds with a coupon rate of 4%, interest payable semiannually. Although the current market rate is 4%, based on current economic forecasts, Zeller and Merkel recognize that market rates might increase to 6% by the time they issue the bonds. Although they do not like the option of added debt, they feel it is a reasonable alternative and should be considered. However, they are not clear on the implications that this bond issue would have on the company and its financial statements, including the impact of the possibility that interest rates might increase by the time the bonds could be actually issued.

2. Zeller and Merkel do realize that they could also outright borrow the $10,000,000 from a financial institution, but again are unclear as to the impact on the financial statements. In addition to describing that impact, they also ask you to compare the advantages and disadvantages of raising the monies via a bond issue versus a loan.

3. A third possibility is to issue 2,600,000 shares of common stock ($2 par value) to current shareholders and a selected group of new investors (a private issue). They have been advised to price the stock to sell at ZM’s book value per share at the end of 2017. In addition to wanting to know the advantages and disadvantages of using this private issue to raise capital, they also ask you to clarify what is meant by “book value per share” and what implications that would have on this scenario.

4. The company does have some shares held in the treasury, and wonder if that might be another viable alternative to raising the needed funds. Zeller and Merkel are curious to see if you know what impact this alternative would have on the company and its financials.

5. The fifth option is to proceed with an initial public offering (IPO). Based on current and anticipated economic conditions, the resurgence of the IPO market, and interest in high-tech companies, Zeller and Merkel think they could get an IPO price of around $5 per share. At this price, they would need to issue approximately 2,000,000 shares.  
Prepare a detailed and thorough business memo in good business format describing the advantages and disadvantages of each scenario described above. Keep in mind that you are writing to entrepreneurs, not accountants. Which alternative would you recommend and why? Be sure to justify your answer by comparing the merits of raising capital through bonds, loans, and common stock. Keep in mind that you will need to document your memo with references as to the sources of any outside information as Zeller and Merkel will want to know where the information came from.

Answer 1

Solution:-

1. Analysis of the benifits and risks associated with various options of funding:-

Options	Benifits	Risks
Issue the funds through the issue bonds at 4% interest payable semiannually	1.There is no partaking in the benefits of the investors.	1.there is sureness for money outpourings consistently and this will expand the working capital necessity.
	2.A settled charge of 4% semi-every year will be paid which adds up to 6% share every year which is path not as much as the expense of value winning in the market which is as high as 12 - 15%.	2. There is dependably a weight to pay the intrigue regardless of whether the organization does not make any benefits.
	3. Tax breaks of intrigue installments can be profited.	3. The bondholders have charge over the benefits of the organization which can be exchanged in case of default in installment of intrigue or important.
Raising funds via loan	1.The starting cost required for raising the assets from capital markets either through securities issue or offer issue can be limited if the assets are raised through advances from a money related establishment.	1. There is assurance for money surges each year and this will expand the working capital prerequisites .
	2. there is assurance that the whole sum will be acknowledged as against security issue where the measure of cash-flow to be raised relies upon the membership got from the capital market.	2. There is dependably a weight to pay the intrigue regardless of whether the organization does not make any benefits.
	3. tax reduction of intrigue installments can be benefited .	3. there is a hazard that the money related organization may delegate a chosen one chief in the administration of the organization in the occasion where the organization is defaulting in the reimbursements of premium or foremost to shield its advantage which will result in weakening of the responsibility for board.
Raising funds through private issue	1.The expense of issue through capital market membership can be limited.	1. No advantages of duty will be accessible on the profit installments made to investors. moreover,tax as profit dispersion assess should be paid notwithstanding ordinary duty.
	2. There is conviction that the whole sum will be gotten.	2. there is weakening in the responsibility for organization which result in delay in basic leadership.
	3. the time required to raise the assets is additionally decreased as private issue require less administrative consistence when contrasted with open issue.	3. Despite the fact that installment of profit isn't compulsory,to satisfy the desires for investors there is dependably weight on the organization to give least profits .
	4.There is no prerequisite to make settled installments to the investors like advances or bonds. revelation of profit is additionally at the caution of the administration of the organization.	4. legitimate consistence increment complex.
	5.Working capital prerequisites does not increment in the here and now because of no settled installments.	5. the expense of raising obligation id by and large lower than the expense of value.
	6. there is no obligation to make arrangements for reimbursement of the assets at the season of development as the assets are accessible with the organization till unendingness.
Raising funds through IPO (open issue)	1. there is no settled charge which is required to be paid at each period.	1. The underlying expense of raising assets is high.
	2. there is no risk to make arrangements for reimbursement of the assets at the season of development as the assets are accessible with the organization till perpetuity.	2.there is no assurance that the issue will be fruitful as it relies upon the membership by general society.
		3.Regulatory and lawful consistence increment complex and the punishments for resistance is high.
		4. the expense of raising obligation is for the most part lower than the expense of value.
		5.although installment of profit isn't necessary ,to satisfy the desires for profits of investors there is dependably weight on the organization to give absolute minimum profits.
Meaning of book value per share
Book esteems per share is a measure which ascertains the sum per share at book esteem owing to the shareholders.it is ca;calculated as all benefits less of outside liabilities.
Thus,it is a measure which mirrors the esteem per share according to the books of the organization which will be accessible to the investor if the organization is exchanged as on date.