Response - Case 14-4 Issuance Of Bonds

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Response - Case 14-4 Issuance of Bonds Rebecca Walden’s case study is about an announcement, which appeared in the Financial World Journal, on October 15, 2009. This announcement stated the intention of Craft Foods, Inc. to issue $750,000,000 of debentured bonds. It also states that “copies of the prospectus and the related prospectus supplement may be obtained from Keegan Morgan & Co. Inc., Coldwell Bros. & Co., Robert Stacks & Co., and from Sherwin-William & Co.” (Spiceland, Sepe, Nelson, and Tomassini, 2009, p. 941). Requirement 1 Ms. Walden correctly states what is being described by the announcement, which is that the bonds will mature on October 1, 2019 and are being issued at 7.75% interest rate, with a discount rate of 99.57%. The only problem with this scenario is that in the event of Craft Foods declaring bankruptcy, they will have no collateral to repay their investors. Debentured bonds are an unsecure investment and results in the company taking a very large risk to offer them. If the company fails and is unable to pay those bonds, there could be large legal repercussions as well as various government accounting agencies taking a closer look at the practices of issuing debentured bonds in the future. Requirement 2 Next Ms. Walden writes in more detail about the psychological reason behind the securities being priced as they were. She feels that the main motivation for this company is risk. The risk justifies the means and since Craft Foods, Inc. appears to have a less than favorable bond rating they are trying to lure investors by the risk of a discounted rate of 99.57%. Will this risk work? Often it does. There are many investors will in to take the chance on less than solid companies everyday in order to make more money. Requirement 3 Finally Ms. Walden talks about two accounting considerations for Craft Foods, Inc. and how they

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