Determine the securities debt or equity of x , Corporate Finance

X has 10 shareholders, each of whom owns 100 of its 1,000 outstanding shares of common stock (worth $100 per share).  No other stock is outstanding.  Determine whether the securities described in the situations below are debt or equity of X (support your answer with citations as necessary).

(a)    X issues a secured standard form note to the bank promising unconditionally to repay in five years $1 million borrowed, plus interest at the bank's prime rate plus one percent.

(b)   X issues to the public for cash $1 million worth of "pure preferred" stock (nonvoting, nonparticipating, nonconvertible), callable in five years at par, paying an 18% cumulative dividend.

(c)    In return for a transfer of $1 million, X issues an unsecured promissory note for $1 million to Mr. Jones, a well-known local venture capitalist, payable in 10 years with interest keyed to X's profitability.  The note is subordinated to all other debt.  X could not have borrowed this amount on these terms from a bank.



Posted Date: 3/20/2013 6:05:06 AM | Location : United States

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