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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Preferred stock vs. bonds

Living Smart Inc. has decided to expand its operations to owning and operating long-term health care facilities. The following is an excerpt from a conversation between the chief executive officer, Mark Vierra. and the vice president of finance, Jolin Kilcup.
Mark: Jolin, have you given any thought to how we're going to finance the acquisition of St George Health Care?
Jolin: Well, the two basic options, as I see it, are to issue either preferred stock or bonds. The equity market is a little depressed right now. The rumor is that the Federal Reserve Bank may increase the interest rates either this month or next.
Mark: Yes, I've heard the rumor. The problem is that we can't wail around to see what's going to happen. We'll have to move on this next week if we want any chance to complete the acquisition of St George.
Jolin: Well, the bond market is strong right now. Maybe we should issue debt this time around. Mark: Thai's what 1 would have guessed as well. St. George's financial statements look pretty good, except for the volatility of its income and cash flows. But dial's characteristic of ihe industry.
Discuss the advantages and disadvantages of issuing preferred stock versus bonds.

To determine

Concept Introduction:

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date. Bonds may be issued at a premium or discount.

Stocks (Common Stock and Preferred Stock):

There are two types of the share capital of a company. Common Stock represents the Common shares issued to the shareholders and preferred stock represents the preference shares issued. Preference shares are given preference in payment of dividends and repayment of capital. Common shareholders get the inbuilt right to vote in decisions of the company and preference shareholders generally do not get this right but they may get voting rights with special provisions.

To Indicate:

If the advantages and disadvantages of issuing preferred stock and bonds

Explanation

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date. Bonds may be issued at a premium or discount. There are two types of the share capital of a company...

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