Peyton Approved is looking into ways to raise capital to fund expansions. Their first option is to issue 10%, 100-par convertible preferred stock. Issuing stock can greatly increase the cash flow of a company but can decrease the power of individual shareholders as it increases the number of shares a single person needs to hold to have power. A company could issue preferred stock that is convertible to try to lower the impact of the act. However, this does mean there is the possibility of a major up tick of common stock hitting the market if it is all converted at the same time. Peyton Approved‘s second option is to issue 8% convertible bonds. Though, the interest is lower on the bonds, the company would have to eventually pay these bonds back, with interest. This might not be the smartest move as the company can not guarantee that the expansion will work out and could find themselves trying to pay off bonds they can not afford. Option number three, issuing a mix of both preferred stock and convertible bonds, appears to be the best move for the company. Peyton Approved recently changed their tax structure. Under the C Corporation Structure, they pay corporate income tax on its income after offsetting it with deductions, credits, and losses. The classification as C Corp is great for a small business. It allows a separate legal
identity and limited liability for the owners while also limiting the power of shareholders. Anyone can hold shares for the company, but it does lead to some double taxation for said shareholders. As a company looking to expand and possibility issue more stock to help with cash flows, having a C Corp tax structure is good for Peyton Approved. With a capital lease, the leasee, in this case Peyton Approved, at the beginning of the term would record an asset and a liability equal to the present value of the lease payments. A lease gives the leasee a temporary asset and thus it increases assets for the company. A capital lease is different than an operating lease as the leasee has to account for executory cost. These costs lower net income which could lead to lower taxes for the company. In this case, Peyton Approved has a leasing term of 6 years with an interest rate of 5%. Peyton approved has a total lease obligation of $106,859.53 which they break down into payments of $20,000 once a year for the six years. During the leasing term, the company would record an interest expense for the interest they deduct from the financing as well as accrue depreciation on the equipment.
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- Balance Sheet, Peyton, equity section of a company