Chapter 20, Problem 1MC

Summary Introduction

The Company E is developing educational software for the primary and secondary school markets. The company believes that the industry will have a shake out or decline. So this to survive in the industry company E wants to grab the market shares and this requires a huge infusion of new capital.

Person P after observing the market trends analyze that the stock price of the company may rise in future thus, cannot raise the new capital and also due to the high interest rates and B rating of the firm it cannot issue the debt instruments. The Person P came up with three alternatives, preferred stock, bonds with warrants and convertible bonds and required to make choice out of these three financial alternatives.

Characters in the case:

• Company E
• Person D

To determine: Difference in preferred stock from that of common stock and debt and the risk involved in preferred stock. Also, explain floating rate preferred stock.