Case 28 Financing Alternatives
Company A. Boudoir’s, Inc.:
This company, a retail clothing store with three suburban locations in Atlanta, Georgia, is incorporated, with each of the three Boudoir sisters owning one-third of the outstanding stock. The company is profitable, but rapid growth has put it under severe financial strain. The real estate is all under mortgage to an insurance company, the inventory is being used under a blanket chattel mortgage to secure a bank line of credit, and the accounts receivable are all being factored. With total assets of $7 million, the company now needs an additional $450,000 to finance a building and fixtures for a new outlet.
Company B. Timberland Power & Light:
Since Timberland Power & Light, a major electric utility, is organized as a holding company, the Securities and Exchange Commission must approve all of its securities issues. Such approval is automatic if the company stays within conventional norms for the public utility industry. Reasonable norms call for long-term debt in the range of 45 percent to 65 percent, preferred stock in the range of 0 to 15 percent, and common equity in the range of 25 percent to 45 percent. Timberland currently has total assets of $1.5 billion financed as follows: $900 million debt, $75 million preferred stock, and $525 million common equity. The company plans to raise an additional $37 million at this time.
Company C. Ripe and Fresh Canning Company:
Ripe and Fresh Canning Company is a large operation located in Valdosta, Georgia, that purchases peaches and other fruits from farmers in Georgia, Florida, South Carolina, Alabama, and Kentucky. These fruits are then canned and sold on 60-day credit terms, largely to food brokers and small retail grocers in the same five-state area. The company’s plant and equipment have been financed in part by a mortgage loan, and this is the only long-term debt. Raw materials (fruits) are purchased on terms calling for payment within 30 days of receipt of goods, but no
This company, a retail clothing store with three suburban locations in Atlanta, Georgia, is incorporated, with each of the three Boudoir sisters owning one-third of the outstanding stock. The company is profitable, but rapid growth has put it under severe financial strain. The real estate is all under mortgage to an insurance company, the inventory is being used under a blanket chattel mortgage to secure a bank line of credit, and the accounts receivable are all being factored. With total assets of $7 million, the company now needs an additional $450,000 to finance a building and fixtures for a new outlet.
Company B. Timberland Power & Light:
Since Timberland Power & Light, a major electric utility, is organized as a holding company, the Securities and Exchange Commission must approve all of its securities issues. Such approval is automatic if the company stays within conventional norms for the public utility industry. Reasonable norms call for long-term debt in the range of 45 percent to 65 percent, preferred stock in the range of 0 to 15 percent, and common equity in the range of 25 percent to 45 percent. Timberland currently has total assets of $1.5 billion financed as follows: $900 million debt, $75 million preferred stock, and $525 million common equity. The company plans to raise an additional $37 million at this time.
Company C. Ripe and Fresh Canning Company:
Ripe and Fresh Canning Company is a large operation located in Valdosta, Georgia, that purchases peaches and other fruits from farmers in Georgia, Florida, South Carolina, Alabama, and Kentucky. These fruits are then canned and sold on 60-day credit terms, largely to food brokers and small retail grocers in the same five-state area. The company’s plant and equipment have been financed in part by a mortgage loan, and this is the only long-term debt. Raw materials (fruits) are purchased on terms calling for payment within 30 days of receipt of goods, but no