Corporation X is a restaurant with 10 shareholders who have each invested $1000 and together own all 10,000 shares of stock of the corporation. There is no other stock or debt outstanding. The corporation needs additional cash to expand its business, and is considering the following alternative ways of doing so:1) an additional cash infusion of $5000 from each of its 10 shareholders(total of $50,000). In exchange for the cash, the corporation would issue each shareholder a $5000 bond due in 15 years with cumulative 5% interest payable at maturity. The current market rate of interest for similar loans is 8%.2) take out a loan from a bank. In exchange, the corporation would issue a secured note promising to repay in 3 years $50,000 borrowed. Interest would be payable annually at prime plus 1% (the market rate of interest).3) issue to the public 500 convertible $100 notes in exchange for cash. The notes would mature in 5 years, and at that time, the holder would be able to receive $100 or convert the note into 200 shares of common stock. Interest would be payable annually at market rate. The notes are subordinate to all other corporate debt.For each alternative above, discuss how the plan might be seen as debt or equity (explore both sides of the argument for each situation, naming the relevant characteristics of each financing arrangement that might support a conclusion of debt or equity). Conclude your consideration of each alternative by advising the corporation how, in your judgment, each instrument would be more likely to be characterized.
Corporation X is a restaurant with 10 shareholders who have each invested $1000 and together ownall 10,000 shares of stock of the corporation. There is no other stock or debt outstanding. The…
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