AUMC Issuing Bonds vs Preferred Stock Discussion

AUMC Issuing Bonds vs Preferred Stock Discussion

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Business Finance

Auburn University Main Campus




Bolster Inc. has decided to expand its operations to owning and operating car washes. The following is an excerpt from the conversation between the chief executive officer, Mike O’Brian, and the vice president of finance, John Ibison:

Mike: John, have you given any thought to how we’re going to manage the acquisition of Swiffer Car Wash?

John: 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.

Mike: 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 Swiffer Car Wash.

John: Well, the bond market is strong right now. Maybe we should issue debt this time around.

Mike: That’s what I would have guessed as well. Swiffer Car Wash’s financial statements look pretty good, except for the volatility of it’s income and cash flows. But that’s characteristic of the industry.

REQUIRED: Discuss the advantages and disadvantages of issuing preferred stock versus bonds.   Remember the company is issuing the bonds, be sure to discuss this from the Company’s point of view not the investor’s point of view.

a. You must have a source within your reply. You may use the book as your reference, but DO NOT copy information word-for-word. You also have the option to use another source. (2 points)

b. There must be at least two advantages and two disadvantages listed with supporting information. (from company’s point of view, who is issuing the bonds or stock not investors) (2 points)

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