High Flyers Inc Solution

High Flyers Inc. Suggested Solution

Risks

The primary risk is the ability to satisfy the ongoing cash flow requirements. For the

straight bonds, semi-annual interest payments must be made, and for the convertible

preferred shares, quarterly dividend payments must be made. Note that these dividends

are not entirely discretionary as are those on the common shares since the dividends on

the preferred shares are cumulative.

There will also be an obligation to repay the principal amount of the bonds upon

maturity or to refinance the bonds. A large payment like this could impair operating

capability. Similarly, if the price of the common shares does not rise as expected to

encourage conversion, the company will be left with relatively high-priced preferred

shares.

The underwriter (as opposed to an agent) will also be taking on the risk of selling these

securities. The complexity or the level of the call price for the preferred shares could

make the convertible preferred shares unattractive to potential investors. The saleability

of common shares would be affected by the expected performance and growth

prospects of the company, while the saleability of the straight bonds would be affected

by market interest rates and the credit rating of the company.

The risk of not beginning to produce positive