The following is a summarized balance sheet of Falcon Corporation at December 31, 2013. All amounts are in $000's. Falcon requires additional financing of $5,000,000 to finance an expansion of its business. The two choices are:
Alternative 1: Issue a 20-year, $5,000,000 5% bond payable at face value.
Alternative 2: Issue 250,000 common shares at $20 each.
In Falcon's industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon's board of directors is risk adverse. Assume that the financing is made at the beginning of the year.
Instructions
a. Calculate the debt to total assets ratio under the two proposed financing methods.
b. Make a recommendation to Falcon on the better financing alternative and explain your choice.

Question

The following is a summarized balance sheet of Falcon Corporation at December 31, 2013. All amounts are in $000's.  Falcon requires additional financing of $5,000,000 to finance an expansion of its business. The two choices are:
Alternative 1: Issue a 20-year, $5,000,000 5% bond payable at face value.
Alternative 2: Issue 250,000 common shares at $20 each.
In Falcon's industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon's board of directors is risk adverse. Assume that the financing is made at the beginning of the year.
Instructions 
a. Calculate the debt to total assets ratio under the two proposed financing methods.
b. Make a recommendation to Falcon on the better financing alternative and explain your choice.

Quizplus · Accepted Answer

The Answer of The following is a summarized balance sheet of Falcon Corporation at December 31, 2013. All amounts are in $000's.  Falcon requires additional financing of $5,000,000 to finance an expansion of its business. The two choices are:
Alternative 1: Issue a 20-year, $5,000,000 5% bond payable at face value.
Alternative 2: Issue 250,000 common shares at $20 each.
In Falcon's industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon's board of directors is risk adverse. Assume that the financing is made at the beginning of the year.
Instructions 
a. Calculate the debt to total assets ratio under the two proposed financing methods.
b. Make a recommendation to Falcon on the better financing alternative and explain your choice.

The Following Is a Summarized Balance Sheet of Falcon Corporation