FUND OF CORP FIN >CUSTOM<
11th Edition
ISBN: 9781308616384
Author: Ross
Publisher: MCG/CREATE
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 7, Problem 4M
Financing S&S Air’s Expansion Plans with a Bond Issue
Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.
Although Chris is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isn’t sure how each feature would affect the coupon rate of the bond issue. You are Renata’s assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature.
4. A call provision with specified call dates and call prices.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Mini Case: FINANCING EAST COAST YACHTS’S EXPANSION PLANS WITH A BOND ISSUE
After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $40 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Kim McKenzie, an underwriter from the firm of Crowe & Mallard, about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of some of them, so he isn’t clear on how each feature would affect the coupon rate of the bond issue.
Respond to the following questions:
1. You are Kim’s assistant, and she has asked you to prepare a memo to Dan describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or…
Solar 123 Limited (SL) is operating in the Boom energy sector. The company recognized that to stay competitive it must Implement projects which would reduce the cost of the products. SL's board of directors approved the recommendation Finance the project by issuing new debt. On January 1, 2019, SL issued new bonds which will mature on December 31, 2038. The bonds have a par value of $1,000 and a coupon rate of 13%. Coupon payments are made semi-annually.
i) What would the value of the bonds on December 31, 2021, if the interest rates had risen to 18%? based on the price of the bon, how would you classify the bond"
ii)What woul dbe the value on June 30, 2027, if interest rates had fallen to 10%? Based on the price of the bond, how would you classify the bond?
iii) If the bonds had a value of $1,080 on June 13, 2027, what would be their yield to maturity on that date?
Module 3: Mini Case: FINANCING EAST COAST YACHTS’S EXPANSION PLANS WITH A BOND ISSUE
After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $40 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Kim McKenzie, an underwriter from the firm of Crowe & Mallard, about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of some of them, so he isn’t clear on how each feature would affect the coupon rate of the bond issue.
Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM on either bond issue will be 7.5 percent. The coupon bond would have a 7.5 percent coupon rate. The company’s tax rate is 35 percent.
1. How many of the coupon…
Chapter 7 Solutions
FUND OF CORP FIN >CUSTOM<
Ch. 7.1 - What are the cash flows associated with a bond?Ch. 7.1 - What is the general expression for the value of a...Ch. 7.1 - Is it true that the only risk associated with...Ch. 7.2 - Prob. 7.2ACQCh. 7.2 - Prob. 7.2BCQCh. 7.2 - Prob. 7.2CCQCh. 7.3 - What does a bond rating say about the risk of...Ch. 7.3 - What is a junk bond?Ch. 7.4 - Prob. 7.4ACQCh. 7.4 - What do you think would be the effect of a put...
Ch. 7.5 - Why do we say bond markets may have little or no...Ch. 7.5 - Prob. 7.5BCQCh. 7.5 - What is the difference between a bonds clean price...Ch. 7.6 - What is the difference between a nominal and a...Ch. 7.6 - What is the Fisher effect?Ch. 7.7 - What is the term structure of interest rates? What...Ch. 7.7 - What is the Treasury yield curve?Ch. 7.7 - What six components make up a bonds yield?Ch. 7 - Prob. 7.1CTFCh. 7 - The 10-year bonds issued by KP Enterprises were...Ch. 7 - Prob. 7.4CTFCh. 7 - Prob. 7.6CTFCh. 7 - The term structure of interest rates is based on...Ch. 7 - Treasury Bonds [LO1] Is it true that a U.S....Ch. 7 - Interest Rate Risk [LO2] Which has greater...Ch. 7 - Treasury Pricing [LO1] With regard to bid and ask...Ch. 7 - Prob. 4CRCTCh. 7 - Call Provisions [LO1] A company is contemplating a...Ch. 7 - Coupon Rate [LO1] How does a bond issuer decide on...Ch. 7 - Prob. 7CRCTCh. 7 - Prob. 8CRCTCh. 7 - Prob. 9CRCTCh. 7 - Term Structure [LO5] What is the difference...Ch. 7 - Crossover Bonds [LO3] Looking back at the...Ch. 7 - Municipal Bonds [LO1] Why is it that municipal...Ch. 7 - Bond Market [LO1] What are the implications for...Ch. 7 - Prob. 14CRCTCh. 7 - Bonds as Equity [LO1] The 100-year bonds we...Ch. 7 - Prob. 1QPCh. 7 - Interpreting Bond Yields [LO2] Suppose you buy a 7...Ch. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Coupon Rates [LO2] Essary Enterprises has bonds on...Ch. 7 - Bond Prices [LO2] Sqeekers Co. issued 15-year...Ch. 7 - Prob. 7QPCh. 7 - Coupon Rates [LO2] DMA Corporation has bonds on...Ch. 7 - Zero Coupon Bonds [LO2] You find a zero coupon...Ch. 7 - Valuing Bonds [LO2] Yan Yan Corp. has a 2,000 par...Ch. 7 - Valuing Bonds [LO2] Union Local School District...Ch. 7 - Calculating Real Rates of Return [LO4] If Treasury...Ch. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Nominal versus Real Returns [LO4] Say you own an...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Bond Price Movements [LO2] Bond X is a premium...Ch. 7 - Interest Rate Risk [LO2] Both Bond Sam and Bond...Ch. 7 - Interest Rate Risk [LO2] Bond J has a coupon rate...Ch. 7 - Prob. 21QPCh. 7 - Prob. 22QPCh. 7 - Accrued Interest [LO2] You purchase a bond with an...Ch. 7 - Prob. 24QPCh. 7 - Finding the Bond Maturity [LO2] Shinoda Corp. has...Ch. 7 - Prob. 26QPCh. 7 - Bond Prices versus Yields [LO2] a. What is the...Ch. 7 - Prob. 28QPCh. 7 - Zero Coupon Bonds [LO2] Suppose your company needs...Ch. 7 - Finding the Maturity [LO2] Youve just found a 10...Ch. 7 - Prob. 31QPCh. 7 - Components of Bond Returns [LO2] Bond P is a...Ch. 7 - Holding Period Yield [LO2] The YTM on a bond is...Ch. 7 - Valuing Bonds [LO2] Jallouk Corporation has two...Ch. 7 - Valuing the Call Feature [LO2] At one point,...Ch. 7 - Prob. 36QPCh. 7 - Real Cash Flows [LO4] When Marilyn Monroe died,...Ch. 7 - Prob. 38QPCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 7MCh. 7 - Prob. 8MCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 10M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Module 3: Mini Case: FINANCING EAST COAST YACHTS’S EXPANSION PLANS WITH A BOND ISSUE After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $40 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Kim McKenzie, an underwriter from the firm of Crowe & Mallard, about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of some of them, so he isn’t clear on how each feature would affect the coupon rate of the bond issue. Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM on either bond issue will be 7.5 percent. The coupon bond would have a 7.5 percent coupon rate. The company’s tax rate is 35 percent. 4. Suppose East Coast…arrow_forwardAccounting for debt investments</b></p><p>League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity. Requirements How would the bond investment be classified on League up’s December 31, 2018, balance sheet? Journalize the following on League Up’s books: Receipt of final interest payment, on December 31, 2022. Disposition of the investment at maturity on December 31, 2022.arrow_forwardEvaluating Annie Hegg's Proposed Investment in Atilier Industries Bonds Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on…arrow_forward
- Evaluating Annie Hegg's Proposed Investment in Atilier Industries Bonds Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on…arrow_forwardBond Refunding. Fara Corporation is considering calling a P20 million, 30-year bond that was issued 10 years ago at a face interest rate of 14 percent. The call price on the bonds is 104. The bonds were initially sold at 97. The initial flotation cost was P200,000. The company is considering issuing P20 million, 12 percent, 20-year bonds in order to net proceeds and retire the old bonds. The new bonds will be issued at face value. The flotation costs for the new issue are P225,000. The tax rate is 46 percent. The after-tax cost of new debt ignoring flotation costs is 6.48 percent (12% x 54%). With flotation costs, the after-tax cost of new debt is anticipated to be 7 percent. There is a 2-month overlap in which interest must be paid on the old bonds and new bonds. Should refunding take place?arrow_forwardEvaluating Annie Hegg's Proposed Investment in Atilier Industries Bonds Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $ 1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0 % coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $ 1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0 % annually, is likely to increase to a 6.0 % annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these…arrow_forward
- Evaluating Annie Hegg's Proposed Investment in Atilier Industries Bonds Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $ 1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0 % coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $ 1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0 % annually, is likely to increase to a 6.0 % annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these…arrow_forwardAccounting for debt investments Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys 51,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity Requirements Journalize any required 2018 entries for the bond investment. How much cash interest will Advance receive each year from FermaCo? How much interest revenue will Advance report during 2018 on this bond investment?arrow_forwardValuing Bonds Using Present ValueE3B. Kirby, Inc., is considering the sale of two bond issues. Choice A is a $800,000bond issue that pays semiannual interest of $64,000 and is due in 20 years. Choice B isa $800,000 bond issue that pays semiannual interest of $60,000 and is due in 15 years.Assume that the market interest rate for each bond is 8 percent. Calculate the amountthat Kirby will receive if both bond issues are made. (Hint: Calculate the present valueof each bond issue and sum.)arrow_forward
- Assume a corporation issue a $2 million bond to finance its new project. The bond pays an 8% semiannual interest rate and will mature in 10 years. The current interest rate for this bond is 6%. What is the price of this bond? $1,728,193.47 $2,297,549.50 $2,294,403.48 $2,000,000.00arrow_forwardProblem 2: Serial Bonds: X Corporation is deciding whether to buy an 12%, P2,000,000-par value bond of Triple A Corporation. They will be issued on Jan. 1, 2022. The bonds mature every year end over 5 years. How much should X offer to purchase the bonds so that it will earn 13%?arrow_forwarda) Kirpalani Limited wants to expand its furniture line. The board of directors have agreed that the fastest way to raise these funds is to issue bonds. The company proceeds to issue $600,000, 10% bonds on March 1st, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. The company closes its books on December 31. Requirements: (Show all workings) I. Calculate the proceeds from the sale of the bond. Clearly show the amount of the premium or discount and state two reasons which support the premium or discount calculated. II. Prepare a bond amortization schedule for the bond’s life III. Prepare all the journal entries for 2020 & 2021arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY