Question

In: Finance

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 1 year ago
Next > < Previous

Related Solutions

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...
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...
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...
Consider ABC Aviation Corporation, a subsidiary of XYZ Aviation Corporation, sold some securities to the public...
Consider 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...
Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor, offered some securities for...
Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor, offered some securities for sale to the public on March 28, 2008. Under the terms of the deal, RBMCC promised to repay the owner of one of these securities $100,000 on March 28, 2039, but investors would receive nothing until then. Investors paid RBMCC $24,599 for each of these securities; so they gave up $24,599 on March 28, 2008, for the promise of a $100,000 payment 31 years...
ABC Corporation is considering an acquisition of XYZ. XYZ has a capital structure of 40% debt...
ABC Corporation is considering an acquisition of XYZ. XYZ has a capital structure of 40% debt and 60% equity, with a current book value of $20 million in assets. XYZ’s pre-merger beta is 1.46 and is not likely to be altered as a result of the proposed merger. ABC’s pre-merger beta is 1.12, and both it and XYZ face a 35% tax rate. ABC’s capital structure is 50% debt and 50% equity, and it has $24 million in total assets....
ABC Corporation had the following transactions: 2020 01-Feb ABC loaned $20,000 To XYZ Corporation in exchange...
ABC Corporation had the following transactions: 2020 01-Feb ABC loaned $20,000 To XYZ Corporation in exchange for a 6% 3 month note 28-Feb Made an adjusting entry to accrue interest on XYZ note. 01-May Collected the XYZ note. 01-Jun Received a 3 month 5% , $250,000 note from KLM Incorporated as settlement for their account. 31-Aug Collected the KLM Incorporated note. 01-Sep Sold goods to 123 Limited , receiving a $20,000 six month 5% note 01-Sep Sold the 123 Limited...
Facts: A Big Company (ABC) is one of several corporations owned entirely by XYZ corporation. XYZ...
Facts: A Big Company (ABC) is one of several corporations owned entirely by XYZ corporation. XYZ is publicly traded on a stock exchange. ABC makes an over-the-counter vitamin pill that has been very popular for many years. ABC engaged the services of a marketing firm, SellALot, LLC, to market this diet pill. Mr. Bragger, the member of the LLC with whom the CEO of ABC directly dealt, had previously told many of SellALot’s clients that he worked for ABC. SellALot...
The following are selected transactions of XYZ Ltd: 12 July   Sold goods on account to ABC...
The following are selected transactions of XYZ Ltd: 12 July   Sold goods on account to ABC Ltd for $2400, terms 3/10, n/30. The cost of the goods sold was $1600. 19 July   Forwarded a credit note for $180 to ABC Ltd covering part of the goods sold on 12 July, which cost $120, that were returned by ABC Ltd as inappropriate. The goods returned were not defective. 21 July   Received from ABC Ltd a cheque in full settlement of the...
ABC Company sold equipment on October 1, 2018, to XYZ Company for £1,000,000. It agrees to...
ABC Company sold equipment on October 1, 2018, to XYZ Company for £1,000,000. It agrees to repurchase this equipment in July 2019, for a price of £1,100,000. The proper accounting treatment for this transaction based on Select one: a. relevance b. going concern c. comparability d. substance over form
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT