Discussion 200 words with references and need 3 post responses (50 words each response)

Read Ethical Dilemma: A Bond Is a Bond is a Bond . . . Is a Stock . . . Is a Bondock?

What should Wally do?

What would you do if you were Wally?

POST1- Tiffiny

Although Wally has the knowledge that the company is highly rated with an A rating, issuing additional debt for raising funds poses a serious threat to the capital structure. It is appropriate for Wally to suggest that the board raise funds through neither pure Debt or equity, but with hybrid instruments like bonders as cited in the text.

I would have suggested the issuance of preferred stock to raise capital in this situation.

· It has been cited in the case that the company is panning for aggressive expansion by buying out the smaller companies. The balance sheet debt of this companies would transfer to the parent company which would generally increase the debt obligations of the parent MRT industries.

· MRT may have to take resort of 'Asset Stripping ' in order to improve the balance sheet reports for the upcoming period where the sale / proceeds of sales are used in order to improve the net profit figures. In order to prevent such aggressive steps , the use of hybrid instruments like bonders is relatively safer considering the operating positions of MRT industries.

Response?

POST2 – LANA

Wally is in an interesting situation with whether or not to issue bondocks. According to Besley & Brigham (2015), “When financial leverage is created, a firm intensifies the business risk borne by the common stockholders” (Ch 14, page 557). Previously, investors have been willing to purchase ORT’s bonds because their default risk has been considered extremely low. By issuing the bondocks, the financial leverage of the company will significantly increase and therefore the value of the recently issued bonds will decrease significantly as well, putting the bondholders/investors at a disadvantage (Besley & Brigham, 2015, pg. 584).

One of my major concerns with the bondocks is that their risk is unknown. This type of security was just introduced in the U.S. Financial markets, and there is not a lot of information on how they have performed in the U.S. for comparison purposes. I would be very hesitant to recommend issuing the bondocks, especially when we would be using that money to purchase younger firms that have not been around very long and are not in the same industry as ORT. There is inherent risk in any new investment but considering the fact that we would be issuing a new kind of security that we don’t know for sure how it will perform to purchase new companies outside of our industry, that seems like a lot of risk for an uncertain potential future reward.

I believe the main ethical issue with the bondocks is the fact that ORT’s executives are major stockholders and their bonuses and incentives are paid in company stock. This is an ethical dilemma in that if Wally pursues recommending issuing the bondocks, it clearly puts the ORT executives in a better position with minimal risk on their part that no matter how the expansion plan performs, while the investors/bondholders of the company are potentially left holding the bag and all the business risk. According to James Chen (2021), “In addition to being difficult to understand, another criticism of some hybrid securities is that they require the investor to take more risk than the potential return warrants” (Hybrid Security). This puts Wally in a position where he has to think about both the investors who are financing the new security to fund the expansion, and the executives who stand to benefit from the expansion performance no matter the outcome.

Response?

POST3 – Alicia

Number of replies: 1

This week's dilemma is interesting, and as I was reading I just kept thinking that Wally needs more information. He's doing his part by researching, however within the case study it's still unclear how risky "bondocks" are, stating that the degree of riskiness is still unknown (Besley et al., 2015, p. 584). Therefore, if I were Wally I'd continue to seek out information and understand the risk before making any recommendations or moving forward with bondocks.

With that said, a part I paused on was the way Wally was going about research. He consulted with friends at other companies, and it seems his research should rather be done in a way that no critical info (or insider info) is leaked. Also, I'm wondering if knowing executives are major stockholders, if it skews his decision-making or applies pressure to make one decision over an another. Overall, I think more information would be helpful for Wally to make the best decision for the company.

Response?

pur-new-sol

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