Preferred Stock vs. Bonds
Corner Inc. has decided to expand its operations to owning and operating slurpee shops. The following is an excerpt from a conversation between the chief executive officer, Sammy Harbor, and the vice president of Finance, Margo Pepper.
Sammy: Margo, have you given any thought to how we are going to the acquisition of Slurppee World?
Margo: 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 Federal Reserve Bank’s going to increase the interest rates either this month or next.
Sammy: Yes, I have 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 Slurppee World.
Margo: Well, the bond market is strong right now. Maybe we should issue debt this time around.
Sammy: That’s what I would have guessed as well. Slurppee World’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 vs. bonds.