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1 Discuss The Arguments For and Against Classifying The Issuance

Sahara Unlimited Inc. needs $25 million to complete development of a new flu vaccine. The company issued additional stock to raise the funds, promising investors 2% of sales until $25 million is received. There are arguments both for and against classifying this stock issuance as debt. A practical solution may be for investors to receive their original investment plus a profit when the $25 million is repaid and then surrender the stock.

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Miroslav Gegoski
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110 views

1 Discuss The Arguments For and Against Classifying The Issuance

Sahara Unlimited Inc. needs $25 million to complete development of a new flu vaccine. The company issued additional stock to raise the funds, promising investors 2% of sales until $25 million is received. There are arguments both for and against classifying this stock issuance as debt. A practical solution may be for investors to receive their original investment plus a profit when the $25 million is repaid and then surrender the stock.

Uploaded by

Miroslav Gegoski
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1 Discuss the arguments for and against classifying the

issuance #8879
1. Discuss the arguments for and against classifying the issuance of the $25 million of stock as
debt.2. What do you think might be a practical solution to this classification problem?Sahara
Unlimited Inc. began operations on January 2, 20Y4, with the issuance of 250,000 shares of $8
par common stock. The sole stockholders of Sahara Unlimited Inc. are Karina Takemoto and
Dr. Noah Grove, who organized Sahara Unlimited Inc. with the objective of developing a new flu
vaccine. Dr. Grove claims that the flu vaccine, which is nearing the final development stage, will
protect individuals against 80% of the flu types that have been medically identified. To complete
the project, Sahara Unlimited Inc. needs $25,000,000 of additional funds. The banks have been
unwilling to loan the funds because of the lack of sufficient collateral and the riskiness of the
business. The following is a conversation between Karina Takemoto, the chief executive officer
of Sahara Unlimited Inc., and Dr. Noah Grove, the leading researcher:Karina: What are we
going to do? The banks won't loan us any more money, and we've got to have $25 million to
complete the project. We are so close! It would be a disaster to quit now. The only thing I can
think of is to issue additional stock. Do you have any suggestions?Noah: I guess you're right.
But if the banks won't loan us any more money, how do you think we can find any investors to
buy stock?Karina: I've been thinking about that. What if we promise the investors that we will
pay them 2% of sales until they have received an amount equal to what they paid for the
stock?Noah: What happens when we pay back the $25 million? Do the investors get to keep the
stock? If they do, it'll dilute our ownership.Karina: How about, if after we pay back the $25
million, we make them turn in their stock for what they paid for it? Plus, we could pay them an
additional $50 per share. That's a $50 profit per share for the investors.View Solution:
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