Shaffer Inc

question 197

Essay

Shaffer Inc. is considering two alternatives to finance its construction of a new $5 million plant.
(a) Issuance of 500,000 shares of common stock at the market price of $10 per share.
(b) Issuance of $5 million, 8% bonds at par.
Instructions

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Definitions:

Fair Value

An estimate of the price at which an asset or liability could be traded in a fair transaction between willing parties, other than in a forced or liquidation sale.

Unrealized Gain

A profit that exists on paper resulting from an investment that has not yet been sold for cash, indicating an increase in value of the asset.

Equity Method

An accounting technique used to record an investor's proportional share of the associate company's earnings and losses.

Accounting Change

Any significant alteration in accounting policies, estimation methods, or reporting practices that impacts the financial statements of a company.