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Bond Refunding Strayer Education, Inc.

593 words - 2 pages

Bond Refunding - Strayer Education, Inc.As Brigham and Ehrhardt discuss in Financial Management, refunding bonds involves two decisions. The first focuses on profitability, "is it profitable to call an outstanding issue in the current period and replace it with a new issue?" The second decision looks at timeliness of the refunding related to the firm's value, "would the firm's expected value be increased even more if the refunding was postponed to a later date?" ((Brigham, E. & Ehrhardt, M., p. 766). Throughout the paper, there is a review of Strayer Education's capital structure and debt philosophy, advantages and disadvantages of debt to a firm's operation and a hypothetical bond refunding situation. Recommendations, based on the questions posed above, are made.Strayer Education's capital structure is a combination of preferred and common stock. In 2002, their structure was 0% debt, 61% preferred stock and 39% common stock. They have no short or long term debt (http://www.strayereducation.com/EdgarDetail.cfm?Company ID=STRA&CIK=1013934&FID=950136-03-1894&SID=03-00 ). As Robert S. Silberman, CEO, says in Strayer's annual report, "our capital structure remains sound, and we continue to generate more free cash flow than we use"(http://www.strayereducation.com/annual.cfm, p. 6). Strayer has no outstanding bonds and if they did they would probably choose to pay off the debt, but for the purpose of this paper refunding options will be reviewed.Although Strayer has no short or long term debt, there are several advantages of debt, which include tax deductible interest payments, financial obligations are specified and of a fixed nature, in an "inflationary economy" debt might be paid back with "cheaper dollars", and the use of debt may lower the cost of capital to the firm (Block, S. & Hirt, G., p. 470). Strayer may need to review these benefits and utilize debt when appropriate.Certainly, debt has several disadvantages as well. For instance, interest and principal payment obligations must be met as specified in the contract, no matter...

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