ADVANCED MATERIAL TECHNOLOGY CORPORATION CASE STUDY
Advanced Material Technology Corporation (AMT), a Japanese organization, needs to raise additional capital to fund its capital expenditures over the next three years. It has identified three possible options for accomplishing this: a straight bond issue, a convertible bond issue, or a bond with warrant issue. The decision that AMT makes will affect its credit rating as well as its potential to raise capital in the future. In addition, debt requires repayment and so the company will be taking on an additional obligation, as well. This analysis considers the various benefits and drawbacks to these alternatives and considers the best strategy for AMT.
Straight debt is the simplest way to issue debt. In this strategy, the company issues bonds with a specific interest rate. Bonds are issued for a specific period of time, and the company repays the bond and interest at the end of that time (Kimmel, Weygandt & Kieso 449). Although AMT is a Japanese company, it may choose to issue bonds in a different currency than the yen, and to issue its bonds in the overseas markets. These types of bonds are still considered straight bonds, but they protect AMT from some of the Japanese regulations that might render it difficult to complete the transaction in Japan. Since the dollar is a relatively stable currency, issuing the bonds in dollars might prove an attractive alternative.
Convertible bonds have the feature of being convertible to common stock at some predetermined price. In other ways, they are the same as straight bonds. Both convertible bonds and straight bonds can be traded on the secondary market. Convertible bonds can have a particular allure to investors if the investors believe that the stock price will increase past the conversion price. In this way, investors can benefit from the increase in the stock price, but without taking on the same risk a
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