Board of Directors Meeting
Financial Agenda Topics:
1. Capital Structure:
a. A newly formed corporation is attempting to determine the appropriate mix of debt and equity. The initial capitalization goal is $50 million. The capitalization mix alternatives have been narrowed to two: (1) $10 million in debt and $40 million in equity and (2) $30 million in debt and $20 million in equity. Income before interest and taxes will be $8 million. The interest rate on debt is 8% and the income tax rate is 40%. Calculate the net income and return on shareholders’ equity for both alternatives. Explain how this will ratios as well with the idea that the company is seeking to be bought our by a larger corporation.
2. Effective use of Cash:
a. Company is considering using discounts to generate more cash flow.
b. The Hawthorne Manufacturing Company offers credit customers a 2% cash discount if the sales price is paid within 10 days. Any amounts not paid within 10 days are due in 30 days. These repayment terms are stated as 2/10, n/30. On October 5, 2016, Hawthorne sold merchandise at a price of $20,000. The customer paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4. Use the gross method of accounting.
c. Company is sitting on a large amount of receivable but is cash strapped. What options do we have have? Discuss the options and accounting ramifications for each.
3. Accounting for Major Sale:
a. Company has major sale with an energy company which is semi-regulated by the state. Thus the terms of the contract do not specify the price but only a range which needs to be approved by the regulator agency. The product has already be delivery to the customer. Please advise how the lack of a specific sales price affects the accounting.
4. Discontinue of operations:
a. Company wishes to discontinue operating segment B