Question

Xpand Your Critical Thinking 3-4 (Essay) hieftain International, Inc., is an oil and natural gas exploration and production company. A recent balance sheet nillion in liabilities, all of which were short-term accounts payable. reported $208 ilion in assets with only $a During the year, Chieftain expanded its holdings of oilland oas rights, dilled 37 new wells,and invested in expensive 3-D seismic technology. $19 million cash from operating activities and paid no dividends. It had a cash balance of $102 million at the end of the year. Name at least two advantages to Chieftain from having no long-term debt. Can you think of disadvantages? LINK TO TEXT What are some of the advantages to Chieftain from having this large a cash balance? What is a disadvantage? 1597608 N1006 1//2019

Answer 1

Answer(1): Advantage of having no long term debt:

1. There will be no interest payment on debt and company's liability/obligation decreases. Company's management will not worry for repayment of loan.
2. Company's net profit will be increased as interest as an expenses, will not be deducted from EBIT.

Disadvantage- If company raises funds through debt, it can expand and grow in future by setting up more business, interest on debt is the deductible expenditure from income tax point of view, that benefit company will not be able to avail.

Answer(2): Advantage of having large cash balance-

1. Company can pay its day to day expenditure, company's liquidity increases and net working capital increases. Company can pay salaries and perks on time.
2. Company will have cash to invest into new projects, It can also pay cash dividends to shareholders in future. Company can pay its debt on time if having large cash balance.

Disadvantage of having large cash balance- Large cash balance if lying idle, it is not good, it is not productive, it should be invested into some source so that some return can come. Business will not grow much.