How do the convertible bonds help reduce agency costs

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Reference no: EM131907352

Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded 5 years... Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded 5 years ago to provide educational software for the rapidly expanding primary and secondary school markets. Although EduSoft has done well, the firm’s founder believes an industry shakeout is imminent. To survive, EduSoft must grab market share now, and this will require a large infusion of new capital. Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Duncan does not think it would be wise to issue new common stock at this time. On the other hand, interest rates are currently high by historical standards, and the firm’s B rating means that interest payments on a new debt issue would be prohibitive. Thus, he has narrowed his choice of financing alternatives to (1) preferred stock, (2) bonds with warrants, or (3) convertible bonds. As Duncan’s assistant, you have been asked to help in the decision process by answering the following questions. e. Mr. Duncan believes that the costs of both the bond with warrants and the convertible bonds are close enough to call them even and that the costs are consistent with the risks involved. Thus, he will make his decision based on other factors. What are some of the factors that he should consider? f. How do the convertible bonds help reduce agency costs?

Reference no: EM131907352

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