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ABC Aviation Corporation, a subsidiary of XYZ Aviation Corporation, sold some securities to the public on...

ABC Aviation Corporation, a subsidiary of XYZ Aviation Corporation, sold some securities to the public on June 15, 2017. The securities were bought and sold on the New York Stock Exchange. The terms of the deal are as follows: Promise to repay the owner of one of these securities $100,000 on June 15, 2047 The securities DO NOT pay interest ABC has the right to buy back the securities on the anniversary date at a price established at the time of sale Investors paid ABC $24,500 for each of these securities.

Discuss: Why would ABC be willing to accept such a small amount today ($24,500) in exchange for a promise to repay approximately 4 times that amount in the future?

What impact does the buyback feature have on the desirability of the investment? Would you be willing to pay $24,500 in exchange for $100,000 in 30 years?

What would be your key consideration in answering yes or no? If the U.S. Treasury had offered basically an identical security, do you think it would have a higher or lower price? Why?

If you looked at the New York Stock Exchange price of the stock TODAY, do you think the price would exceed the $24,500 original price? Why?

If you looked in the year 2025, do you think the price would be higher or lower than today's price? Why?

Solutions

Expert Solution

ABC might be willing to accept such a small amount of $24,500 as the other sources of finance i.e banks and current investors may not be ready to finance the operations of the company. Also, ABC company might have great opportunity in hand from which it expects to create great cash flows and profit in future.

Buyback feature is lucrative for the investors as it has a guaranteed cash inflow.

If the U.S treasury had offered an identical security it would have been issued at a lower pirce as they are a secured   option

Today the price of stock would not exceed $24,500 as if this was the case the company could have easily sold its stock at the stock exchange without giving a promised consideration in the future

In the year 2025,would be higher than today's price as the company has sold securities with lucrative promised consideration in the future. If the company is able to achieve its goals, the price shall definitely be higher.

jeff jeffy answered 2 years ago
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