Unit 6 Assignment

CASE STUDY
Constantine’s Grocery Revenue Raising
Options. (Corporate Bond or Common Shares)
Unit 6 Assignment

Author UOP MBA Student

Constantine’s family Grocery has been described to be a a landmark company in a small city

in the USA. They have traded as private company for 60 years and now they are looking for

expanding their business. The decision it is facing is how to raise much needed capital to

maintain its current business operations and to allow the possibility of growth in the future.

The family believes it needs an additional $135 million dollars. (my.uopeople.edu). Hence,

they are looking for means to raise these funds to grow their business. This paper will

therefore look at the two alternatives that they can use. Either by issue publicly debt

(corporate bonds), the other alternative is to issue common stock to the public.

Let’s begin by looking at the first alternative, the issue of public debt or Corporate Bond.

This is the financial obligation that allows the issuer to raise funds by promising to repay the

lender at a certain point in the future and in accordance with the terms of the contract. (Chen.

J). In this case Constantine Grocery can issue a corporate bond and sell it to the investors and

receive the necessary funds that they need as long as they can show the company capabilities

to pay the investors’ money from their future operations earnings. This option will give them

some advantage among them are that

1. Their shares will not be diluted. The shareholding will be returned among the family

members

2. Corporate bonds generally come with the fixed -rate interest hence they will provide

future financial stability for Constantine Grocery and shield the business against

variable interests’ rate or economical changes

3. Corporate bond will enable Constantine Grocery to retain more cash in the business -

because the redemption date for bonds can be several years after the issue date.

(www.nibusinessinfo.co.uk)
Unit 6 Assignment

However there are some disadvantages that Constantine’s family Grocery need to be aware of

if they go this route, among them are

1. regular interest payments to bondholders - though interest may be fixed, the interest

will usually have to be paid even if they make a loss,

2. The potential for the business' share value to be reduced if the profits decline - this is

because bond interest payments take precedence over dividends.

3. Bondholder restrictions - because investors are locking up their money for a

potentially long period of time, they can impose certain covenants or undertakings on

your business operations and financial performance to limit their risk.

(www.nibusinessinfo.co.uk)

Let’s now look at the second option issue common stock to the public. This is where a

Constantine Grocery which is a private company will list its company on the stock exchange

and sell some of its shares to the public. The first implication to this approach is the dilution

of Shares. The Grocery will no longer be a privately-owned family business, but it will be a

public owned company. However, the better side of this approach is that Issuing common

stock in the financial markets is an alternative to issuing debt. Rather than adding more debt

to a company's balance sheet, which is a financial statement, and budgeting for the servicing

of debt, a company can take a less expensive route and issue common stock. With stock, an

organization does not need to make obligatory interest payments to investors and instead can

make discretionary dividend payments when it has extra cash (Terzo. G 2018). If Constantine

Grocery has to sell Common shares as a way to raise the needed capital then they have to

through the Initial Public Offering (IPO) process. Below are the key IPO processes that the

company has to go through.

Unit 6 Assignment

The first step in the IPO process is for the issuing company in case Constantine Grocery

choose an investment bank to advise the company on its IPO and to provide underwriting

services ( corporatefinanceinstitute.com). The selected bank should meet the criterion such as

Good reputation, Industrial expertise, Quality research etc.

The second is about due diligence and is meant to ensure that that the due diligence of the

company such as company’s registration and statements are accurate. It involves the

underwriters in this case the selected investment bank and in this case the bank acts a broker

between the issuing company and the investing public to help the issuing company sell its

initial set of shares (corporatefinanceinstitute.com). This process of due diligence involves,

Customer Calls –getting the information from the customers that has been dealing with this

company, Industry / Market Due Diligence, Legal and IP Due Diligence and Financial and

Tax Due Diligence

The third step is about Pricing. Once SEC approves the IPO, the issuing company and the

underwriter decide the offer price (i.e. the price at which the shares will be sold by the issuing

company) and the precise number of shares to be sold (corporatefinanceinstitute.com). This is

very important because the purpose is to raise the Capital for the company, under-pricing will

mean not getting the necessary capital and over pricing may also resulting in failure by the

public to buy the shares. Hence striking the balance is very important

The fourth step is about Stabilization. The underwriter creates a market for the stock after it's

issued. It makes sure there are enough buyers to keep the stock price at a reasonable level. It

only lasts for 25 days during the "quiet period." (Amedeo. K, 2018). It must be noted also

that stabilization, can only be carried out for a short period of time and during this time the

underwriters manages the trading and influences the pricing

Unit 6 Assignment

The final step, and the 5th one is Transition to market Competition. Once Stabilization has

been achieved, which starts 25 days after the IPO and the moment quite period ends. During

this period, investors transition from relying on the mandated disclosures and prospectus to

relying on the market forces for information regarding their shares. After the 25-day period

lapses, underwriters can provide estimates regarding the earning and valuation of the issuing

company. Thus, the underwriter assumes the roles of advisor and evaluator once the issue has

been made.

In conclusion Constantine’s family Grocery will have to look at both options and see which

one would help them get the necessary funds needed to support their growth. Selling

Common shares to the public would be ideal as this will also give them a good brand name.

How ever they should leave some shares within themselves so that they can return the control

of the business. Getting a Corporate bond will be another option but I think this may be costly

in future if their turbulences in the economy.

REFERENCE

REFFERENCE
Unit 6 Assignment

The Initial Public Offering (IPO) Process retrieved from

https://www.mergersandinquisitions.com/

KIMBERLY AMADEO, December 20, 2018, IPOs, Their Pros, Cons, and the IPO Process

retrieved from https://www.thebalance.com

What is the IPO Process? Retrieved from https://corporatefinanceinstitute.com

Geri Terzo, 2018, Pros & Cons of Issuing Common Stock retrieved from
https://smallbusiness.chron.com

Raise long-term funding through debt capital markets retrieved on 22nd December 2018 from
https://www.nibusinessinfo.co.uk