Question

Xentec Inc. has decided to expand its operations to owning and operating golf courses. The following is an excerpt from a conversation between the chief executive officer, Peter Kilgallon, and the vice president of finance, Dan Baron: Peter: Dan, have you given any thought to how we're going to manage the acquisition of Sweeping Bluff Golf Course? Dan: Well, the two basic options, as I see it, are to issue either preferred stock or bonds. The equity market is a little depressed right now. The rumor is that the Federal Reserve Bank's going to increase the interest rates either this month or next. Peter: Yes, I've heard the rumor. The problem is that we can't wait around to see what's going to happen. We'll have to move on this next week if we want any chance to complete the acquisition of Sweeping Bluff Golf Course. Dan: Well, the bond market is strong right now. Maybe we should issue debt this time around. Peter: That's what I would have guessed as well. Sweeping Bluff Golf Course's financial statements look pretty good, except for the volatility of its income and cash flows. But that's characteristic of the industry. Discuss the advantages and disadvantages of issuing preferred stock versus bonds.

Answer 1

Disadvantages of Issuing Preferred stock versus bonds are -

Preferred shares have a big disadvantages for investors, companies almost always offer high interest rates to sell them.The difference between bond rates and preferred rates has a big disadvantage, that the reason a company is rising capital with preferred shares despite the cost disadvantage may be because that's the only way it can raise money. Due to the reason it is widely known, can cause investor to perceive that issuing preferred share is a sign of weakness. Whether this is correct or not, unless the company's financial strength is very well-known, issuing preferred shares may lower the price of its common shares.Issuing bonds allows a company to access capital much faster than if it first had to earn and save profits.