Mini Case Analysis #2 7 Bonds, unlike stocks, do not include an ownership stake in the company (Thibodeaux, 2017). When you issue a bond, your current shareholders keep whatever ownership equity they have in the company. They therefore keep the control of the business (Thibodeaux, 2017). When you issue a bond, you tell the bondholder exactly when he can cash in the bond. You also set the rate of interest you will pay (Thibodeaux, 2017). Thus, the repayment of the loans obtained via bonds is very predictable (Thibodeaux, 2017). This enables you to estimate what the company's financial obligations will be at a specific point to some degree, which makes planning for opera - tions easier (Thibodeaux, 2017). when you issue a bond, you are not obligated to share the prof - its generated by using the loaned funds (Thibodeaux, 2017). You must pay interest on any bonds you issue that have a designated interest rate (Thibodeaux, 2017). However, you can deduct the interest payments on your company income tax return. Overall, this means that bonds have a lower after-tax cost and don't cost you as much to offer (Thibodeaux, 2017). There are several advantages for company’s who use the bond market to raise capital for their operating needs, even with the disadvantages of risk, and public perception the benefits outweigh these risks. Thus, the best way for Tuxedo Air to reap these benefits if with security bonds, because they have low coupon rates and can be used in the short term. In the future, when and if Tuxedo Air becomes a publicly traded company they may want to consider, convertible bonds . This type of bond starts off acting just like other bonds, but offers investors the opportunity to convert their holdings into a predetermined number of stock shares, this conversion may enable investors to benefit from rising stock prices and give companies a loan they don’t have to repay.
Mini Case Analysis #2 8
Mini Case Analysis #2 9 References Ross, S. A., Westerfield, R., Jordan, B. D., & Biktimirov E.N. (2016). Fundamentals of Corpo- rate Finance. finance. McGraw-Hill Ryerson Limited. Ismailidou, E. (2016, February 25). Companies are having the hardest time selling their bonds in a decade. [Article]. Retrieved from: - market-is-the-toughest-for-companies-to-tap-in-a-decade-2016-02-25 Thibodeaux, W. (2017). Advantages & Disadvantages to Issuing Bonds in order to Raise Capi- tal. Retrieved from: ? q=cache:rGvvoo0OFMUJ:thefinancebase.com/advantages-disadvantages-issuing-bonds- order-raise-capital-3899.html+&cd=17&hl=en&ct=clnk&gl=ca Appendix
Mini Case Analysis #2 10 Figure 1: Memorandum to Ed Cowen from Suzanne’s Assistant
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