Seneca Corporation Has the Following Balance Sheet Accounts Immediately Preceding

question 28

Essay

Seneca Corporation has the following balance sheet accounts immediately preceding an investing and financing decision:
$\begin{array}{lr}\text { Current assets } & \$ 430,000 \\\text { Long-lived assets } & 1,070,000 \\\text { Current liabilities } & 120,000 \\\text { Long-term liabilities } & 630,000 \\\text { Contributed capital } & 100,000 \\\text { Retained earnings } & 650,000\end{array}$
A long-term debt covenant specifies that Seneca's debt/equity ratio cannot be greater than 1.0 and current ratio cannot be less than 2.0.
Seneca is going to invest $600,000 in a new machine that will keep Seneca Corporation in an excellent competitive position in a very competitive industry. In order to finance this investment, Seneca will use its cash, issue long-term debt, and issue common stock. However, besides having to adhere to the debt covenants, Mr. Seneca, the sole owner of Seneca Corporation, will not issue more than $100,000 of common stock so that he can retain at least a 50% ownership in his corporation.
Can Seneca Corporation finance the $600,000 investment and still adhere to the debt covenants and allow Seneca to retain at least 50% ownership? If Seneca cannot finance the machine within the parameters given, suggest possible means for Seneca to finance the needed acquisition of the machine.

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Definitions:

Desirable

Qualities or features that are attractive or sought-after in various contexts, such as products, traits, or outcomes.

Undesirable

A characteristic or condition deemed negative, unwanted, or harmful in a particular context.

Subjective

Based on or influenced by personal feelings, tastes, or opinions.

Objective Bases

The foundation or criteria that are independently verifiable and not influenced by personal feelings or opinions.