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Module 2 Case Information  Zeller & Merkel, Inc. (ZM) is a mid-sized high-techmanufacturing firm that...Module...

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Accounting

Module 2 Case Information  
Zeller & Merkel, Inc. (ZM) is a mid-sized high-techmanufacturing firm that has taken you on as an intern. You are verythankful for this opportunity, especially as Tim Zeller andChristine Merkel are known for giving their interns opportunitiesto use their accounting knowledge by asking for the student’sevaluation of important scenarios in a live business. A goodexample is ZM’s current plan to raise money through a stock issuerather than a debt issue. You recall from your IntermediateAccounting class that issuing debt imposes a fixed financialobligation on the company, but does not convey ownership to thedebt holders. However, if ZM issues stock, it gives up someownership and thus some control. You know Zeller and Merkel areprotective of the company, and you wonder why they would choose toissue stock. You decide to ask them the next day.

ZM is very receptive of your inquiry, and they invite you to giveyour evaluation and opinion on the following 5 scenarios they havebeen considering for raising the necessary money forexpansion:

1. Issue $10,000,000 of 10-year bonds with a coupon rate of 4%,interest payable semiannually. Although the current market rate is4%, based on current economic forecasts, Zeller and Merkelrecognize that market rates might increase to 6% by the time theyissue the bonds. Although they do not like the option of addeddebt, they feel it is a reasonable alternative and should beconsidered. However, they are not clear on the implications thatthis bond issue would have on the company and its financialstatements, including the impact of the possibility that interestrates might increase by the time the bonds could be actuallyissued.

2. Zeller and Merkel do realize that they could also outrightborrow the $10,000,000 from a financial institution, but again areunclear as to the impact on the financial statements. In additionto describing that impact, they also ask you to compare theadvantages and disadvantages of raising the monies via a bond issueversus a loan.

3. A third possibility is to issue 2,600,000 shares of common stock($2 par value) to current shareholders and a selected group of newinvestors (a private issue). They have been advised to price thestock to sell at ZM’s book value per share at the end of 2017. Inaddition to wanting to know the advantages and disadvantages ofusing this private issue to raise capital, they also ask you toclarify what is meant by “book value per share” and whatimplications that would have on this scenario.

4. The company does have some shares held in the treasury, andwonder if that might be another viable alternative to raising theneeded funds. Zeller and Merkel are curious to see if you know whatimpact this alternative would have on the company and itsfinancials.

5. The fifth option is to proceed with an initial public offering(IPO). Based on current and anticipated economic conditions, theresurgence of the IPO market, and interest in high-tech companies,Zeller and Merkel think they could get an IPO price of around $5per share. At this price, they would need to issue approximately2,000,000 shares.  
Prepare a detailed and thorough business memo in good businessformat describing the advantages and disadvantages of each scenariodescribed above. Keep in mind that you are writing toentrepreneurs, not accountants. Which alternative would yourecommend and why? Be sure to justify your answer by comparing themerits of raising capital through bonds, loans, and common stock.Keep in mind that you will need to document your memo withreferences as to the sources of any outside information as Zellerand Merkel will want to know where the information came from.

Answer & Explanation Solved by verified expert
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Solution 1 Analysis of the benifits and risks associated with various options of funding Options Benifits Risks Issue the funds through the issue bonds at 4 interest payable semiannually 1There is no partaking in the benefits of the investors 1there is sureness for money outpourings consistently and this will expand the working capital necessity 2A settled charge of 4 semievery year will be paid which adds up to 6 share every year which is path not as much as the expense of value winning in the market which is as high as 12 15 2 There is dependably a weight to pay the intrigue regardless of whether the organization does not make any benefits 3 Tax breaks of intrigue installments can be profited 3 The bondholders have charge over the benefits of the organization which can be exchanged in case of default in installment of intrigue or important Raising funds via loan 1The    See Answer
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In: AccountingModule 2 Case Information  Zeller & Merkel, Inc. (ZM) is a mid-sized high-techmanufacturing firm that...Module 2 Case Information  Zeller & Merkel, Inc. (ZM) is a mid-sized high-techmanufacturing firm that has taken you on as an intern. You are verythankful for this opportunity, especially as Tim Zeller andChristine Merkel are known for giving their interns opportunitiesto use their accounting knowledge by asking for the student’sevaluation of important scenarios in a live business. A goodexample is ZM’s current plan to raise money through a stock issuerather than a debt issue. You recall from your IntermediateAccounting class that issuing debt imposes a fixed financialobligation on the company, but does not convey ownership to thedebt holders. However, if ZM issues stock, it gives up someownership and thus some control. You know Zeller and Merkel areprotective of the company, and you wonder why they would choose toissue stock. You decide to ask them the next day.ZM is very receptive of your inquiry, and they invite you to giveyour evaluation and opinion on the following 5 scenarios they havebeen considering for raising the necessary money forexpansion:1. Issue $10,000,000 of 10-year bonds with a coupon rate of 4%,interest payable semiannually. Although the current market rate is4%, based on current economic forecasts, Zeller and Merkelrecognize that market rates might increase to 6% by the time theyissue the bonds. Although they do not like the option of addeddebt, they feel it is a reasonable alternative and should beconsidered. However, they are not clear on the implications thatthis bond issue would have on the company and its financialstatements, including the impact of the possibility that interestrates might increase by the time the bonds could be actuallyissued.2. Zeller and Merkel do realize that they could also outrightborrow the $10,000,000 from a financial institution, but again areunclear as to the impact on the financial statements. In additionto describing that impact, they also ask you to compare theadvantages and disadvantages of raising the monies via a bond issueversus a loan.3. A third possibility is to issue 2,600,000 shares of common stock($2 par value) to current shareholders and a selected group of newinvestors (a private issue). They have been advised to price thestock to sell at ZM’s book value per share at the end of 2017. Inaddition to wanting to know the advantages and disadvantages ofusing this private issue to raise capital, they also ask you toclarify what is meant by “book value per share” and whatimplications that would have on this scenario.4. The company does have some shares held in the treasury, andwonder if that might be another viable alternative to raising theneeded funds. Zeller and Merkel are curious to see if you know whatimpact this alternative would have on the company and itsfinancials.5. The fifth option is to proceed with an initial public offering(IPO). Based on current and anticipated economic conditions, theresurgence of the IPO market, and interest in high-tech companies,Zeller and Merkel think they could get an IPO price of around $5per share. At this price, they would need to issue approximately2,000,000 shares.  Prepare a detailed and thorough business memo in good businessformat describing the advantages and disadvantages of each scenariodescribed above. Keep in mind that you are writing toentrepreneurs, not accountants. Which alternative would yourecommend and why? Be sure to justify your answer by comparing themerits of raising capital through bonds, loans, and common stock.Keep in mind that you will need to document your memo withreferences as to the sources of any outside information as Zellerand Merkel will want to know where the information came from.

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