(Learning Objective 1, 2, 4: Making an investment sale decision) Cathy Talbert is the general manager of Barham Company, which provides data-management services for physicians in the Columbus, Ohio, area. Barham Company is having a rough year. Net income trails projections for the year by almost $75,000. This shortfall is especially important. Barham plans to issue stock early next year and needs to show investors that the company can meet its earnings targets. Barham holds several investments purchased a few years ago. Even though investing in stocks is outside Barham’s core business of data-management services, Talbert thinks these investments may hold the key to helping the company meet its net income goal for the year. She is considering what to do with the following investments:
1. Barham owns 50% of the common stock of Ohio Office Systems, which provides the business forms that Barham uses. Ohio Office Systems has lost money for the past 2 years but still has a retained earnings balance of $550,000. Talbert thinks she can get Ohio’s treasurer to declare a $160,000 cash dividend, half of which would go to Barham.
2. Barham owns a bond investment purchased 8 years ago for $250,000. The purchase price represents a discount from the bonds’ maturity value of $400,000. These bonds mature 2 years from now, and their current market value is $380,000. Ms. Talbert has checked with a Charles Schwab investment representative, and Talbert is considering selling the bonds. Schwab would charge a 1% commission on the sale transaction.
3. Barham owns 5,000 shares of Microsoft stock valued at $53 per share. One year ago,Microsoft stock was worth only $28 per share. Barham purchased the Microsoft stock for $37 per share. Talbert wonders whether Barham should sell the Microsoft stock.
Evaluate all 3 actions as a way for Barham Company to generate the needed amount of income. Recommend the best way for Barham to achieve its net income goal.
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