Financing Through Bonds 1. What would cause corporate management to obtain cash

Question

Financing Through Bonds

1. What would cause corporate management to obtain cash by issuing bonds instead of selling stock?

2. Which type of bonds would give management greater flexibility in formulating and controlling a corporation's financial affairs?

3. In what situations would management be wise to issue additional common stock rather than bonds to meet long-term capital needs?

4. Why would management repurchase and retire a corporation's bonds prior to their maturity?

5. Cook Corporation's board of directors is considering authorization of a new bond issue. The controller notes that the bonds are callable at 101.

6 at any time beginning five years after the date of the bond contract. What does this mean? What is the advantage of such a provision?

Explanation / Answer

1. Various reason could cause the same. One of which may be to not dilute the ownership or lower cost as compared to equity.

2. Covertible bonds give the management a lot of flexibility.

3. when future cashflows are not certain, it is advisable not to take fixed cost of interest and rather issue equity which have no fixed obligation.

4. when the corporation has ideal cash and the investment opportunity would yield interest lower than the debt cost, it is advisable to repay the debt before meturity.

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