Short Essay Questions
1.Seneca Corporation has the following balance sheet accounts immediately preceding an investing and financing decision:
Current assets
|
$ 430,000
|
Long-lived assets
|
1,070,000
|
Current liabilities
|
120,000
|
Long-term liabilities
|
630,000
|
Contributed capital
|
100,000
|
Retained earnings
|
650,000
|
A long-term debt covenant specifies that Seneca’s debt/equity ratio cannot be greater than 1.0 and current ratio cannot be less than 2.0.
Seneca is going to invest $600,000 in a new machine that will keep Seneca Corporation in an excellent competitive position in a very competitive industry. In order to finance this investment, Seneca will use its cash, issue long-term debt, and issue common stock. However, besides having to adhere to the debt covenants, Mr. Seneca, the sole owner of Seneca Corporation, will not issue more than $100,000 of common stock so that he can retain at least a 50% ownership in his corporation.
Can Seneca Corporation finance the $600,000 investment and still adhere to the debt covenants and allow Seneca to retain at least 50% ownership? If Seneca cannot finance the machine within the parameters given, suggest possible means for Seneca to finance the needed acquisition of the machine.
2
.For what reasons might a company purchase treasury stock?
3.What rights do preferred shareholders have that common shareholders do not?