Preferred Stock vs. Bonds
1. 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.
2. Peter: Dan, have you given any thought to how we're going to the acquisition of Sweeping Bluff Golf Course?
3. 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.
4. 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.
5. Dan: Well, the bond market is strong right now. Maybe we should issue debt this time around.
6. 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.
7. Discuss the advantages and disadvantages of issuing preferred stock versus bonds.