The Howland Carpet Company has grown rapidly during the past 5 years. Recently,
ID: 2674903 • Letter: T
Question
The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $250,000 carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors.Discussions with an investment banker have resulted in the decision to raise $500,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored).
* Alternative 1: Sell common stock at $8
* Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i.e., the conversion price is $10 per share).
* Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10.
John L. Howland, the president, owns 80% of the common stock and wishes to maintain control of the company. There are 100,000 shares outstanding. The following are extracts of Howland
Explanation / Answer
Total current
liabilities
$150,000
Long-term debt
Common stock, par $1
162,500
Paid-in capital
437,500
Retained earnings
50,000
Total assets
$800,000
Total claims
$800,000
Total current
liabilities
$150,000
Long-term debt
Common stock, par $1
150,000
Paid-in capital
450,000
Retained earnings
50,000
Total assets
$800,000
Total claims
$800,000
Total current
liabilities
$150,000
Long-term debt
500,000
Common stock, par $1
150,000
Paid-in capital
450,000
Retained earnings
50,000
Total assets
$13000,000
Total claims
$13000,000
Original Plan 1 Plan 2 Plan
Number of shares 80,000 80,000 80,000 80,000
Total shares 100,000 162,500 150,000 150,000
Percent ownership 80% 49% 53% 53%
Total current
liabilities
$150,000
Long-term debt
Common stock, par $1
162,500
Paid-in capital
437,500
Retained earnings
50,000
Total assets
$800,000
Total claims
$800,000
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