Mini Case 7


The purpose of this assignment is to explain core concepts related to stock, equity, debt, and the roles they play in making tactical financial decisions.

Read the Chapter 20 Mini Case on pages 824-825 in

Financial Management: Theory and Practice

. Using complete sentences and academic vocabulary, please answer questions a and b.

APA format is not required, but solid academic writing is expected.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

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.
a. How does preferred stock differ from both common equity and debt? Is preferred
stock more risky than common stock? What is floating rate preferred stock?
b. How can knowledge of call options help a financial manager to better understand
warrants and convertibles?

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