Here is the question your boss has posed to you. She knows that in six weeks there is an interest payment to bond holders (20 year long term bonds, with semi-annual coupon payments totaling $100,000). In addition, the firm has 200,000 shares of stock outstanding, with dividends expected to be $0.50 per share. No notice has gone out to shareholders on the dividend payments yet. Here is the problem: Revenues have dropped significantly due to changes in oil prices and it doesnt look like there will be sufficient funds in cash to pay both bond coupon payments and dividends on common stock. It is anticipated that there will be $100,000 available, but not $200,000 based on current cash flows.

Your boss has asked for a memo describing the viable options open to the firm. Should you pay bond holders? What happens if you dont pay the coupon payments on the date due (what is the worst case scenario)? Should you pay the common dividends? What happens if you dont pay dividends? Some consequences are financial and some may be legal, address each. Are there other viable alternatives?