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WCT, WCT320041, WCT120039, WCT120014, WCT720063, WCT220027 - Coggle Diagram

- - - - Explanation:
      - To: CFO, Rudder Co.
      - From: Financial Controller, Rudder Co.
      - Date: March 3, 20X9
      - Re: Raising additional capital based on the two alternatives.
      - You have requested that I detail the different considerations to be made in the issuance of convertible debt or the issuance of redeemable preferred shares.
      - Convertible bonds give bondholders the option to exchange the bond for a specific number of shares of the issuing corporation’s common stock. This gives bondholders the opportunity to profit from increases in the value of the common shares. Regardless of the price of the common shares, the value of a convertible bond will be at least equal to its bond value without the conversion option. As the conversion option is valuable to bondholders, convertible bonds can be issued with lower yields compared to otherwise identical straight bonds. Potential bondholders have to pay a premium for convertible bonds or / and will be paid less interest or coupons compared to a non-convertible bond due to the convertible nature of the bonds. In other words, the company can raise more money or can reduce the future interest expense by offering the convertible option in a bond. It will reduce the cost of debt.
      - A callable or redeemable preferred shares is a type of preferred shares in which the issuer has the right to call in or redeem the stock at a predetermined price after a defined date. Preferred shareholders generally have no voting rights but they have preference as to dividends and receipt of capital upon liquidation of the company and they are paid a fixed amount of dividends. A callable preferred stock issue is advantageous to the company, as it confers the flexibility to lower the issuer's cost of capital if interest rates decline or if it can issue preferred stock later at a lower dividend rate. The company is protected from rising financing costs and market fluctuations. If the financing costs decline, the company can redeem or call the preferred share at the predetermined price and can reissue the preferred share at the lower financing cost.
      - As the cost of debt is always less than the cost of preferred equity, I recommend the issuance of convertible debt if the debt is within the optimal capital structure. If the debt has already reached the threshold level, I recommend the issuance of preferred shares as it will improve the debt to equity ratio.
      - If you have any questions, please contact me.