Zambrano Wholesale Corporation maintains its records on a cash basis. At the end of each year the company’s accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2021:
Cash receipts:From customers$720,000Interest on note4,720Loan from a local bank80,000Total cash receipts$804,720Cash disbursements:Purchase of merchandise$399,000Annual insurance payment7,080Payment of salaries219,000Dividends paid to shareholders10,000Annual rent payment28,500Total cash disbursements$663,580
Selected balance sheet information:

12/31/202012/31/2021Cash$29,500$170,640Accounts receivable66,500101,000Inventory89,00066,500Prepaid insurance3,400?Prepaid rent11,900?Interest receivable3,540?Note receivable59,00059,000Equipment145,000145,000Accumulated depreciation(44,500)(59,000)Accounts payable (for merchandise)114,500131,000Salaries payable20,90025,800Notes payable080,000

Interest payable0?
Additional information:
On March 31, 2020, Zambrano lent a customer $59,000. Interest at 8% is payable annually on each March 31. Principal is due in 2024.
The annual insurance payment is paid in advance on April 30. The policy period begins on May 1.
On October 31, 2021, Zambrano borrowed $80,000 from a local bank and signed a note promising repayment. Principal and interest at 6% are due on October 31, 2022.
Annual rent on the company’s facilities is paid in advance on June 30. The rental period begins on July 1.
1. Prepare an accrual basis income statement for 2021 (ignore income taxes).

2. Determine the following balance sheet amounts on December 31, 2021:


forms of market efficiency.

Purpose of Assignment 

The purpose of this assignment is to demonstrate to students how the issuance of debt to purchase outstanding common stock could affect the value of the company’s equity and redefine the capital structure. The problem will also allow students to explore the effect of corporate taxes through debt financing. 

Assignment Steps 

Resources: Corporate Finance

Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Hightower, Inc. is currently an all-equity company worth $7.5 million with 400,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. The tax rate is 35%.

Prepare a 1,050-word memo advising the management of Hightower, Inc. on the financial impact, including the following: 

  • What is the expected return on the company’s equity before the announcement of the debt issue?
  • Construct the company’s market value balance sheet before the announcement of the debt issue. What is the price per share of the firm’s equity?
  • Construct the company’s market value balance sheet immediately after the announcement of the debt issue.
  • What is the company’s stock price per share immediately after the repurchase announcement?
  • How many shares will the company repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?
  • What is the required return on the company’s equity after the restructuring?
  • Discuss the advantages and disadvantages of debt financing over equity financing. 

Show all calculations and submit with your memo. 

Format your paper consistent with APA guidelines.