Chieftain International, Inc. is an oil and gas exploration and production company. A recent balance sheet reported 208 million liabilities, all of which were short-term accounts payable. During the year, Chieftain expanded its holdings of oil and gas rights, drilled 37 new wells, and invested in expensive 3-D seismic technology. The company generated 19 million cash from operating activities and paid no dividends. It had a cash balance of 102 million at the end of the year. A) Name at least two advantages to Chieftain from having no long-term debt. Can you think of disadvantages? One notable advantage with having no longer term debt when in good times or bad Chieftain International will have no high fixed costs. So it will be flexible to spend money in revenue generating activities like drilling more oil wells. Another advantage is looking more favorable and profitable to investors to generate more capital. A Disadvantage would be not establishing enough payments to show fiscal responsibility and the ability to borrow if needed. B) What are some of the advantages to Chieftain from having this large a cash balance? What is a disadvantage? Some advantages for Chieftain in having a large cash balance is that they could have the ability to purchase another company if the opportunity presents itself, or negotiate for a better goods and services. A disadvantage would be a loss in collecting interests on money generated. C) Why do you Suppose Chieftain has the 4.6 million balance in accounts payable, since it appears that it could have made all its purchases for cash? Chieftain wants to show its ability to borrow and make payments for future acquisitions.
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