Sonos is a maker of wireless internet-enabled speaker systems. It was founded in

Question

Sonos is a maker of wireless internet-enabled speaker systems. It was founded in California in 2002 and has experienced rapidly growing sales. Its CEO, John MacFarlane, indicated that Sonos would exceed $1 billion in sales in 2014. In December 2014, the privately-held Sonos issued an additional $130 million in new equity. It will be using part of the funds to make future acquisitions. In addition, Sonos is expanding its headquarters to more than 100,000 square feet in downtown Santa Barbara, California. The expansion also includes an extensive remodel of the facility.

Question:

a. When Sonos issued the $130 million in equity, how was the balance sheet impacted? What accounts would be affected?

b. When Sonos issued the $130 million in equity, how was the income statement impacted, if at all?

c. How is the $130 million in new equity issuance reported on the statement of cash flows?

d. What are the benefits to Sonos for using equity instead of borrowing funds? What are the disadvantages to Sonos of issuing additional equity?

e. How will the expansion and remodeling of Sonos’ headquarters impact its balance sheet? Its income statement? Its statement of cash flows?

Explanation / Answer

a)

First part: The total of the asset and the liability &shareholders’ equity sides of the balance sheet will be increased by $130 million respectively.

Second part:

The common stock account will increase by $130 million thereby increasing the shareholders ‘equity by the same amount. On the asset side the Cash will be increased by $130 million

b) The issue of equity will have no impact on the income statement.

c) In the cash flow statement, the issue of $130 million equity will be reported as cash inflow under the Cash Flow from Financing Activities section.

d)

First part:

Sono doesn’t have to incur any interest cost on raising capital by issuing equity. Moreover there is no obligation to refund the amount raised by equity to the shareholders. In case the fund is borrowed, the obligations of interest payment and repayment of borrowed capital after a stipulated time period will have to bear by Sono.

Second part:

The main disadvantage of issuing equity is the dilution of control of the company. The control of the existing shareholders of the Sono will be diluted on issue of $130 million shares. Moreover, the company has to pay dividend to the shareholders to hold the confidence of the market as well as the shareholders of Sono. However, payment of dividend is not mandatory for the company.

e) As the remodelling is extensive, it is a capital expenditure. Likewise the expansion of the headquarter is also a capital expenditure. The Value of the headquarter (non- current asset) will increase and the cash balance (current asset) will decrease with these capital expenditures. As the current asset will decrease with a simultaneous increase of the fixed assets by the same amount, the total of the balance sheet will remain same.

The expenditures being capital in nature will have no impact on the income statement. However, the depreciation expense of the re-valued headquarter will increase and will reduce the net profit from operation in the income statement.

The expenditure on the expansion and remodelling of headquarter will be reported as cash outflow in the “cash flow from Investing activity” section of the cash flow statement of the company.

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