Problem

Moon Corporation and Star Corporation are in the same line of business and both were recen...

Moon Corporation and Star Corporation are in the same line of business and both were recently organized, so it may be assumed that the recorded costs for assets are close to current market values. The balance sheets for the two companies are as follows at July 31.2007:

MOON CORPORATION Balance Sheets July 31.2007
Assets		Liabilities&Owner's Equity
Cash	$ 18,000	Liabilities:
Accounts Receivable	26,000	Notes Payable
Land	37,200	(due in 60 days)...		$ 12,400
Building	38,000	Accounts Payable		9,600
Office Equipment	1,200	Total liabilities		$ 22,000
		Stockholders' equity:
		Capital Stock	$60,000
		Retained Earnings	38,400	98,400
Total	$120,400	Total		$12$120,400

STAR CORPORATION Balance Sheet July 31,2007
Assets		Liabilities&Owner’s Equity
Cash	$ 4,800	Liabilities:
Accounts Receivable	9,600	Notes Payable
Land	96,000	(due in 60 days)...		$ 22,400
Building	60,000	Accounts Payable		43,200
Office Equipment	12,000	Total liabilities		$ 65,600
		Stockholders’ equity:
		Capital Stock	$72,000
		Retained Earnings	44,800	116,800
Total	$182,400	Total		$182,400

Instructions

a. Assume that you are a banker and that each company has applied to you for a 90-day loan of $12,000. Which would you consider to be the more favorable prospect? Explain your answer fully.

b. Assume that you are an investor considering purchasing all the capital stock of one or both of the companies. For which business would you be willing to pay the higher price? Do you see any indication of a financial crisis that you might face shortly after buying either company? Explain your answer fully. (For either decision, additional information would be useful, but you are to reach your decision on the basis of the information available.)