FINANCIAL PRINCIPLES AND MANAGMENT (A publicly held company has common and prefe
ID: 2739304 • Letter: F
Question
FINANCIAL PRINCIPLES AND MANAGMENT
(A publicly held company has common and preferred stock that is held by many investors and is actively traded.)
Discuss the questions/statements below:
A sinking fund can be set up in one of two ways:
(a) the corporation makes annual payments to the trustee, who invests the proceeds in securities (frequently government bonds) and uses the accumulated total to retire the bond issue at maturity;
(b) the trustee uses the annual payments to retire a portion of the issue each year, either calling a given percentage of the issue by a lottery and paying a specified price per bond or buying bonds on the open market, whichever is cheaper.
Given all this, please discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.
Explanation / Answer
1)
The advantage: If the interest rate will not fall, the trustee will be favor to keep the bonds from the corporation because they will have higher profits.
The disadvantage: If the interest rate fall, firms will want to keep the bonds from the government because they feel it is safer to buy government bonds
2)
The advantage: The bondholders will keep their bonds when the stock price is getting higher and the company will not call the bond. The firm prefert to buy the bond from the open market.
The disadvantage: Each shareholder will have a limited amount of cash be given from the liquidation of the sinking fund. The firm will default and it takes longer time
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.