Question

Consider the following scenarios where a company wishes to raise funds. In each case suggest what fixed incomes securities they could use to best meet their needs, and where they might issue them. Consider specific product details and the benefits they would bring to the company and/or their investors.

3. The company is a technology firm that believes it has ‘cracked’ autonomous vehicles. Having only IPO’d two years ago, the company is still some time from selling its first car, with testing, licensing and regulatory hurdles to clear. Competition is fierce, but a successful launch will impact their expected cash flows and share price.

4. The company is a large, established insurance firm. Due to an unexpectedly bad winter and high levels of claims, they have found themselves short of liquid assets. They anticipate recovering the shortfall from normal business operations over the next 6 months.

5. The company is a international firm that operates a chain of coffee shops. While headquartered in Switzerland, most of its revenues are generated elsewhere. The company anticipates, but is not certain, of receiving a windfall, in 2 years time when it plans to sell its coffee production and processing business.

Answer 1

Answer to Scenario 3:

Since the company is a newer one and has not yet started sales on its ambitious project on autonomous vehicles ,the company may not be able to bear the burden of serving a fixed income securities since the interest on such securities has to be paid irrespective of the fact if the company makes money or not. In any case it may want to raise funds, the company can issue preferred stock since although preferred dividend is fixed the payment can be deferred to next year whenever the company has funds. Also, the tenure for such stock is higher than corporate bonds which will not push the company into repayment burden as well.