A board of directors is considering raising cash for a proposed acquisition, and they asked you to
Question:
A board of directors is considering raising cash for a proposed acquisition, and they asked you to explain to them the pros and cons of both debt issuance and equity issuance. what would your response be?
Not surprisingly, the board doesn't really listen to you and issues a security that has attributes of both debt and equity. They have asked you to provide a tax opinion on whether the instrument is debt or equity? based on the following facts what would your conclusion be? explain.
1. Obligation becomes payable in 10 years. But payment of interest and repayment of the obligation is subject to approval by the bank regulator. At the date of the issuance, it is likely that the regulator will approve the payments.
2. Interest accrues at 6% a year. A 10 year debt instrument issued by a competing bank pays 5.4% interest.
3.At issuance, the bank already has a capital structure that includes $20m in debt, which matures in 15 years and is senior to the newly issued debt and a $5m in common stock issuances. the regulator has expressed a desire to try to pay off the $20m debt before the newly issued $50m debt is repaid.