Seth Heglar
L27821185
ACCT 301
June 27th, 2024
Judgement Case 3 – 8:
1)
2) Option one would be expected to achieve the highest first-year profits. This is due to the
corporation Cherokee Plastics interest expense on their debt would be $0, as they have no debt to
pay back, they have $50,000,000 in equity rather than debt.
3) Option two would have the highest rate of return on their equity due to the equity amount
being lower than option one. Please see below for the calculation on each options rate of return.
Option One: $3.75 million / $50 million = 7.5%
Option Two: $2.55 million / $30 million = 8.5%
Seth Heglar
L27821185
ACCT 301
June 27th, 2024
4) Option two would be considered the riskier alternative. This being due to Cherokee Plastics
having debt that they must make interest expense payments on. If for some reason the business is
not going well for one year, they could really find themselves in a sticky situation when having
to cover their overhead which would include said hefty interest payment. With option one,
Cherokee Plastics would not have any debt borrowed from creditors, all of their money was
raised and is considered equity. The judgement case quotes “The corporation is not legally liable
to make distributions to its owners. If the board of directors does decide to make a distribution, it
is not an expense of the corporation and does not reduce taxable income and hence the taxes the
corporation pays.” (Spiceland, et al, pg. 74, 2023). Option one poses less risk as there is no
obligation to pay any of the invested money back to the owners, and investment is a risk to the
owner, not the corporation.
Biblically speaking, option one would be the best in the situation. Proverbs 22:7 states “The rich
rule over the poor, and the borrower is slave to the lender.” (The Holy Bible, 2020). When one
borrows (money in this instance), the borrower is instantly tied to the lender until the debt is
paid/given back in full plus interest. During this time the lender can seem to have control over an
entity’s operations and actions. Option two poses a lot more risk as the borrower will have to
make payments on this debt until the debt is covered. Philippians 4:19 states “And my God will
meet all of your needs according to the riches of His glory in Christ Jesus.” (The Holy Bible,
2020). As a follower of Christ, God knows what we need and when we need it. If we are meant
to have $50,000,000 raised to begin business, then He will provide. God has promised to
provide, by taking on debt we choose to define our needs by using another resource to get what
we want. I think we often can overlook that sometimes what we need most, is God to deny us
what we want the most.
Seth Heglar
L27821185
ACCT 301
June 27th, 2024
References
Spiceland, J.D., Nelson, M., Thomas, W., & Winchel, J. (2023). Intermediate Accounting (11th
ed). McGraw-Hill LLC.
NIV The Holy Bible. (2020). Zondervan.
