Question
A manufacturer of farm equipment is doing very well.Management is considering acquiring one of their smaller competitors.The finance department is analyzing 4 different financing alternatives:
A manufacturer of farm equipment is doing very well.Management is considering acquiring one of their smaller competitors.The finance department is analyzing 4 different financing alternatives:
1) Issuing $10 million of common shares.
2) Issuing $10 million in cumulative preferred shares with a yield of 3.5%.
3) Issuing $10 million of convertible debentures with a yield of 2.8%.
4) A one-year term loan from the company's bank at 5.5% with strict interest coverage ratios.
The common shares are currently trading at $8/share on the TSX with a yield of 1.5%.The company currently doesn't have any preferred shares or convertibles outstanding.
What are the advantages and disadvantages of each of the four options from the COMPANY's perspective.
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