Question

Let’s go back to the Double-R Nutting Company. Suppose that Double-R’s bonds have a face value of $53. Its current market-value balance sheet is:

Book-Value Balance Sheet
Net working capital	$	35	Bonds outstanding	$	40
Fixed assets		25	Common stock		20
Total assets	$	60	Total liabilities and shareholders’ equity	$	60

Who would gain or lose from the following maneuvers?

a. Double-R pays a cash dividend of $25.

Stockholders

Bondholders

b. Double-R halts operations, sells its fixed assets for $9, and converts net working capital into $35 cash. It invests its $44 in Treasury bills.

Stockholders

Bondholders

Answer 1

A. Cash dividend paid of $25.00

Stockholders: - Shareholder gain the benefit because they get $25.00 as a cash dividend.

Bondholders:- Bond holders already they can get regular interest whether dividend given or not. So,      there is no gain or loss to bond holders.

B. Sells the asset and convert working capital into cash, then the raised cash used for purchase of Treasury Bills.

Stockholders: - Shareholders may lose the share price, because if working capital converts into cash and used for purchase of Treasury bills. Then company don’t have cash to run the business so, it may lose the worthiness of company then share price will drop.

Bondholders:- Bond holders gain the benefit because, Interest from those bill will increase the bondholders value.