Notes

[Shashank Saggar]

1. What is the problem that CCI is facing? Does the FELINE PRIDES security solve this problem (see Exhibit 8)? You can assume that the equity constraint CCI faces is to limit the Cox family's dilution to 65% economic equity ownership. Checking Exhibit 8D, how does the security satisfy the constraints that CCI is under. 

Can’t dilute owners interest below 65% and at the same time maintain the bond ratings.

2. Decompose the PRIDES security into simpler components and price it. Is the security being issued at a fair price to CCI?

Issuing calls with the terminal payoff in 3 years. If the stock price drops, Cox gets 1.4414 number of shares as opposed to 1. The investor will not get any cash. If the value goes up, the number of stocks received is 1.196 but the cash payoff would decrease.

The payoff :

The workability of Feline: Cox family is willing to give up by investing the cash, the investor gets 7% coupon. They can choose to keep it three years down the line and come up with the extra cash to buy the common equity. The other option is to get stocks depending on the multiplier. 

3. If you look at Exhibit 8, how is the FELINE PRIDES security accounted for in the Cox family equity dilution numbers? Is this sensible?

The debt does not show up on the balance sheet. Instead, the preferred stocks show up without the voting rights.