Question

I answered the questions but do not feel 100% about my answer want to compare it to another

Maria Santos was recently promoted to senior vice president and assistant to the CFO at Paradise Environmental Designs (PED).

In her new position, Maria is responsible for raising external funds for PED. When the firm needs to raise capital, her team recommends the type of financial instrument that should be issued, completes the appropriate paperwork, negotiates with PED’s investment bankers, and so forth. In a departmental meeting a couple of days ago, the CEO stated that he thought the rate at which PED has been raising capital has been much too high, and he wants any future funds that are raised to have substantially lower costs. Although he blamed her predecessor, the comments were clearly directed at Maria and the members of her department.

As a result, Maria felt that she had to come up with some means by which PED can lower the costs of funds in the future. Because she is fairly new to her position, Maria thought it would be a good idea to meet with others who are more experienced in raising funds for corporations. One of the persons who offered Maria some ideas is Roger, a close friend of hers, who works at Superior Investment Networks (SIN), which is one of the investment banking organizations used by PED. Roger suggested that PED consider issuing convertible bonds rather than straight, or traditional, bonds. He explained that a convertible bond can be issued at a lower interest rate than an identical bond that is not convertible because the conversion feature is a benefit to investors rather than to issuers.

Roger also explained that convertibles are somewhat complex hybrid securities. Other than the information that Roger gave her, Maria knows nothing about convertibles. But because Roger is a friend and his description of convertibles was intriguing, she decided to investigate whether it would be appropriate for PED to use convertibles. When she arrived at work this morning, Maria was told that PED plans to raise $400 million as soon as possible to invest in new projects that the CEO wants to purchase within one year.

Unfortunately, Maria hasn’t had a chance to collect more information about convertibles. Even so, she thinks that a convertible might be an appropriate instrument to issue at this time. As a result, Maria called Roger and asked him how she could learn more about convertibles in a short time period. Roger told her that SIN presents a conference each year at which invited participants discuss various aspects of convertibles. The topics that are covered at the conference range from the basics of convertible securities to more complex topics. The conference seems to be exactly what Maria needs to become more informed about the advantages and disadvantages of issuing convertibles, so she asked Roger to provide her with specific information about the conference, including the dates, costs, specific session topics, and so forth.

One hour ago, Roger called with details about the SIN conference. The seven-day conference will be held aboard a cruise ship as it sails to exotic ports in the Mediterranean Sea. The sessions are scheduled during the time the ship is traveling from one port to another, which generally takes four or five hours. When the ship is in port, the conference coordinator has arranged for the participants to take tours, play golf and tennis, lounge at the beach, and enjoy the local entertainment. The conference sounds great to Maria because she can work and relax at the same time.

One thing bothers her, however—all of the costs, including recreation, relaxation, and entertainment activities will be paid by SIN. Maria is convinced that she will get the information she needs at the SIN conference. But she is concerned that attending the conference might be considered a conflict of interest because she knows that SIN representatives will try to convince her to use the company’s services to issue convertibles. She also knows that Roger will earn substantial commissions if PED uses SIN to issue convertibles. Further, Maria is concerned that material and information she receives at the conference will be one-sided (biased). If she is going to attend the conference, Maria needs to register within the next couple of days. As a result, she needs to make a decision soon.

QUESTIONS -

1. What do you think Maria should do?
2. If she decides to work with SIN to purchase the convertible bonds, do you think she can remain impartial?
3. What do you think is the best decision for PED?

Answer 1

Convertible bonds are good option for a company to raise capital with low cost of debt. This can further be beneficial as company performs better since the holder may convert the bond to equity and in this case the entire debt vanishes for the company. Hence for a company which has good expectation for its future cashflows convertible securities are a good alternative to lower cost of capital.

Coming to the question, I dont think Maria should accept the invitation by SIN unless authorized by the company. If she wants to attend it should be through official channel and not through personal ground. To get more inforamtion about the Convertible securities Maria can always set up an official meeting with SIN. SInce Marias job is to give consultation for financing capital, there will be a proper official way to deal with these situations.

If Maria accept the offer to sail in the ship on personal grounds, there will always be bias for her for SIN and it can impact the effectiveness of here decision making. Morover SIN also will be having business interest to pay for all the entertainment activities of people like Maria. Hence in the conference they will definitely try to point out their business interest.

Hence to stay on neutral grounds and be ethical she should not attend the conference in the ship.