A steady source of cash precipitate is critical to maintaining a good credit rating. Edison's cash flows ar extremely safe for two reasons. First, the order supplies a dish for which the demand is very inelastic. It takes an incredible leap in electrical energy costs for people to reduce their electricity consumption at all. Furtherto a greater extent, in the United States, electricity is seen as a necessity. from each one customer is certain to buy at least just about electricity each month, assuring Edison a level of near certain revenue.
The second aspect of Edison's industry that makes its cash flows much secure is the regulation imposed by the government. This regulation come ups the terms of electricity lower than the mart would set it. Though this results in lower profits, it means that the market will buy more electricity than the confederacy will supply. Edison is certain to be running at full capacity all of the time, and can judge to receive revenues every month as well.
Mr. Fohrer says that it is important to keep the company's bond rating above BBB. Otherwise the company would non be able to acquire new-fangled financing. Corporate debt is normally make in the practice of bonds. To keep a incessant rate of interest rate risk, the bonds are usually knowing to mature at different times. In a company like Edison, where debt is a normal part of the capital stru
preferent stock can period of play a role in protecting a company from scenarios that threaten the companies ability to bridge from one term of bonds to the next. Preferred stock does not retire unless management chooses.
Furthermore, management in any case usually has the option to delay paying the dividends until cash flows recover. However, the cost is higher because technically preferred stock is another form of ownership, and is therefore does not have the advantage of tax-deductible interest. Plus the market generally requires a premium in return to bear for the ability to defer the dividends.
The reason Edison did not suffer as badly when its bond rating was changed was its function as a regulated industry. Edison was able to quickly have its rates raised, which ensured an ontogeny in future cash flows. This mitigated the risk intricate with lending to this company and allowed Edison to obtain the bridge financing it mandatory to alleviate the situation of not being able to gist new bonds to rethre those that wdre maturing.
cture, issuing new bonds pays the debt. Without the ability to issue new bonds the company would be suddenly forced to either fade away some of its assets to pay the debt, which tends to result in losses when done quickly, or to issue more stock, which would have a diluting final result on the present equity.
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