Let us go back to Circular File’s market value balance sheet:
Net working capital | $20 | $25 | Bonds outstanding |
Fixed assets | 10 | 5 | Common stock |
Total assets | $30 | $30 | Total value |
Who gains and who loses from the following maneuvers?
a. Circular scrapes up $5 in cash and pays a cash dividend.
b. Circular halts operations, sells its fixed assets, and converts net working capital into $20 cash. Unfortunately the fixed assets fetch only $6 on the secondhand market. The $26 cash is invested in Treasury bills.
c. Circular encounters an acceptable investment opportunity, NPV = 0, requiring an investment of $10. The firm borrows to finance the project. The new debt has the same security, seniority, etc., as the old.
d. Suppose that the new project has NPV = +$2 and is financed by an issue of preferred stock.
e. The lenders agree to extend the maturity of their loan from one year to two in order to give Circular a chance to recover.
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