Arley Merchandise Corporation Case Study Example | Topics and Well Written Essays - 500 words

Arley Merchandise Corporation - Case Study Example If the company sought to issue $8 per share in market value of common stock then the earnings per share would be further diluted as if the shares are valued at less than $8 on the stock market at the exercise date. The company does not currently pay dividends and do not expect to pay dividends in the future. It means that shareholders would have to manufacture there own dividends. Selling shares to obtain income (manufacturing dividends) will involve additional costs such as broker fees and therefore does not represent an attractive option for the investors. The ten year note is therefore a more favourable option as it will prevent the company of going outside. The rate of 128% above treasury rate is just 1% higher than the rate of 127% which was offered in January 1983. Although issuing the ten year note increases debt, it does not involve a negotiation of interest rate; neither does it consider the level of debt currently available. Arley Merchandise would only be paying interest o n the notes which is fixed. Interest expense is an allowable deduction for tax purposes. If the company decides to pay divide pay dividend in the future it would be a less advantageous option to investors. Furthermore, the ten year note is a less risky option for investors as they have prior claim over shareholders should the company go into bankruptcy. It would therefore attract more investors to buy the company’s shares. The fact that it pays interest quarterly makes it even better.