Equity structure and impact I-14.01 Equity structure and impact I-14.01

Summary information for Branford Corporation’s balance sheet follows: BRANFORD CORPORATION Balance Sheet August 15, 20X4 Assets Cash $ 125,000 Accounts receivable 250,000 Inventory 750,000 Property, plant, & equipment (net) 860,000 Total assets $1,985,000 Liabilities Accounts payable $125,000 Accrued liabilities 260,000 Notes payable 290,000 Total liabilities $ 675,000 Stockholders’ equity Common stock, $5 par $700,000 Paid-in capital in excess of par 300,000 Retained earnings 310,000 Total stockholders’ equity 1,310,000 Total liabilities and equity $1,985,000 Branford’s business is growing rapidly, and the company needs to expand its manufacturing facilities. This expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring five alternatives to obtain the necessary capital:

DEBT OPTION: Branford is able to borrow, on a 5-year note, the full amount needed. The interest rate on this note would be 7%, and the note would require monthly payments. COMMON STOCK OPTION: Branford has identified an investor who is willing to pay $1,000,000 for 40,000 newly issued common shares. Common shares have been paying a dividend of $0.50 per share. Branford anticipates that this dividend rate will be maintained. NONCUMULATIVE PREFERRED STOCK OPTION: Branford has identified a hedge fund that will pay $1,000,000 for 8% noncumulative preferred stock to be issued at par. CUMULATIVE PREFERRED STOCK OPTION: Branford has identified an insurance company that will pay $1,000,000 for 6% cumulative preferred stock to be issued at par. CONVERTIBLE PREFERRED STOCK OPTION: Branford has identified a retirement fund that will pay $1,000,000 for 4% cumulative preferred stock to be issued at par. The preferred stock must be convertible into 25,000 shares of common stock at the option of the retirement fund. (b) Which of the alternative financing scenarios involve fixed committed payments to investors, and which involve discretionary payments? (c) Which one of the alternative financing scenarios presents the least risk to existing shareholders? Which one of the scenarios involves the most ownership dilution for existing shareholders?

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