Question

You're an analyst in the finance dpet of Flyover Corp a new firm in a profitable but risky high-tech business. Several growth opportunities have come along recently, but the company doesn't have enough capital to underake them. Stock prices are down, so it doesn't make sense to try to raise new capital through the sale of equity. The company's bank won't lend it any more money than it already has and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be attraxtive enough to allow Flyover to borrow. I need to write brief memo summarzing your ideas.

Answer 1

Solution:

Preparing a Brief Memo by Summarizing Ideas:

The Problem of Flyover is taken as a Too Risky Problem for the Firm and for Debt Investors. By Approaching the Two methods, it can help in lowering the Risk by making the new Debt and the Second Approach may be the Exisiting Level of Risk is Acceptable.

The risk in new bonds could be lowered by as follows:

• Securing the bonds with owned assets.
• Agreeing to subordinate future debt.
• Providing a restrictive indenture limiting the risk in future undertakings.
• Providing a sinking fund for principal repayment.

The current level of risk might be made acceptable by as follows:

• Including a convertible feature.
• Issuing the new bonds in the junk bond market.