Issuing Bonds vs Preferred Stock


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Background: V&C Bakery, Inc., currently owns a local bakery and has been successful selling their products in their own storefront bakery for years. About three years ago they began selling their products wholesale to local grocery stores and specialty shops. They have continually grown their revenues and profits year over year. They now want to expand their wholesale business to sell prepackaged and bulk packaged cakes, cookies and pies to grocery stores, bakeries, and retail shops nationwide. They will need a cash infusion into their business to increase their sales and profitability. The cash infusion will be used to increase their production facility output, upgrade packaging and shipping capabilities to support the new business activities.

The following is an excerpt from the conversation between the chief executive officer of V&C Bakery, Joe VanWinkle, and the vice president of finance of V&C Bakery, John Clancy.

Joe to John: John have you given thought to how we are going to manage the expansion of the business?

John: Well, we have a couple of options as I see it. We can either issue preferred stock or issue bonds. As food for thought you should know that the equity market is a little depressed right now and I have heard a rumor that the Federal Reserve Bank is going to increase the interest rates soon.

Joe: I have also heard that same rumor! I don’t think we can afford to wait to see what is going to happen! We will need to move on this quickly in order to get the process started timely and to meet the needs of the stores that have already expressed interest in stocking our products.

John: Well, you know the bond market is strong right now, maybe we should issue debt this time around!

Joe: I was thinking along those same lines! We have a strong balance sheet, however our cash inflows and income maybe a little more seasonal with the expansion.

REQUIRED: Be sure to follow the directions below as not following the specific instructions will cost you points.

Discuss the advantages and disadvantages of V&C Bakery, Inc’s expansion issuing preferred stock versus bonds to fund their expansion. Remember that V&C Bakery, Inc is the issuer of the preferred stock or the bonds, so be certain to discuss the pros and cons from the standpoint of the issuer, not from the view of the purchaser/holder of the preferred stock or the bonds.

  1. You must have a reference source as a basis for your discussion! Within your reply you must cite your reference source after your discussion. You may use your textbook as a reference source, or you may use another source. DO NOT copy the information word-for-word from any source, you should put the discussion in your own words! Points for citing your source 1 point, if you fail to cite the source, then you will not receive the points (1 point)
  2. You must include two advantages and two disadvantages for issuing Preferred Stock and two advantages and two advantages for issuing Bonds as you are considering both types of securities. (Preferred Stock and Bonds). These must be from the issuer’s point of view and not from the buyer or holder’s point of view. Remember that V&C Bakery, Inc is the issuer. This contrast of the advantages and disadvantages should be in your own words. (2 points)
  3. Make a choice between the two types of securities and tell why you choose that security over the other. (1 point)
  4. Your comments should be at least a paragraph and well thought out! (1 point)
Explanation & Answer

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