UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 8, Problem 1MC
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 $50 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.
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 disadvantages of each feature.
a. The security of the bond, that is, whether or not the bond has collateral.
b. The seniority of the bond.
c. The presence of a sinking fund.
d. A call provision with specified call dates and call prices.
e. A deferred call accompanying the above call provision.
f. A make-whole call provision.
g. Any positive covenants. Also, discuss several possible positive covenants East Coast Yachts might consider.
h. Any negative covenants. Also, discuss several possible negative covenants East Coast Yachts might consider.
i. A conversion feature (note that East Coast Yachts is not a publicly traded company).
j. A floating rate coupon.
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 6.5 percent coupon rate. The company’s tax rate is 35 percent.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The following tutorial questions serve as practice questions on TVM and Bond Valuation.
Consider Donald and Joe who are both 30- years of age and recently graduated with a degree in Finance. Both Donald and Joe plan to retire at age 67, and the retirement plan pays a 12 percent per annum return and is also compounded monthly. Donald plans to invest $1,000 per month beginning next month into his retirement account, while Joe shall invest $2,000 per month. Joe however does not plan to begin investing until 10 years after Donald begins to invest. How much will each of the newly grads have at retirement?
On December 31, 2019, Speedo’s Limited bought a yacht for $55,000, but made a down payment of $10,000. Speedo’s agreed to pay the balance in 10 equal end-of-year instalments and 10% interest on the declining balance. Calculate the annual payments.
Entrepreneurs use country clubs to network with other entrepreneurs or individuals working
in the same field to gain partnerships and sometimes get early access to market information.
To apply for a membership, you must first purchase a membership bond for twenty thousand
dollars. In addition, monthly membership payments are done for two hundred and fifty
dollars. Suppose you want to pay your membership fees including the bond face value for the
next 30 yrs in one payment and the bond can earn an Annual Percentage Rate of 6%,
compounded monthly. What amount must you pay now to commit to the membership?
Answer:
The following tutorial questions serve as practice questions on TVM and Bond Valuation (Answer All Questions).
Maryann is planning a wedding anniversary gift of a trip to Hawaii for her husband at the end of 5 years. She will have enough to pay for the trip if she invests $5,000 per year until that anniversary and plans to make her first $5,000 investment on their first anniversary. Assume her investment earns a 4 percent interest rate, how much will she have saved for their trip if the interest is compounded in each of the following ways?
a. Annually b. Quarterly c. Monthly
2. Your grandfather left an inheritance for you of $100,000. However you can only drawdown on the investment as follows:
Years 1 – 3 $15,000 each year
Year 4 to 6 $10,000 each year
Year 7 $25,000
Interest on the fund is 5%.
a. What is the present worth of this inheritance?
b. Due to high liquidity interest rate have dropped to 4%.…
Chapter 8 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 8 - Prob. 1CQCh. 8 - Prob. 2CQCh. 8 - Prob. 3CQCh. 8 - Yield to Maturity Treasury bid and ask quotes are...Ch. 8 - Coupon Rate How does a bond issuer decide on the...Ch. 8 - Real and Nominal Returns Are there any...Ch. 8 - Prob. 7CQCh. 8 - Prob. 8CQCh. 8 - Term Structure What is the difference between the...Ch. 8 - Crossover Bonds Looking back at the crossover...
Ch. 8 - Municipal Bonds Why is it that municipal bonds are...Ch. 8 - Prob. 12CQCh. 8 - Treasury Market Take a look back at Figure 8.4....Ch. 8 - Prob. 14CQCh. 8 - Bonds as Equity The 100-year bonds we discussed in...Ch. 8 - Bond Prices versus Yields a. What is the...Ch. 8 - Interest Rate Risk All else being the same, which...Ch. 8 - Valuing Bonds What is the price of a 15-year, zero...Ch. 8 - Valuing Bonds Microhard has issued a bond with the...Ch. 8 - Prob. 3QPCh. 8 - Coupon Rates Rhiannon Corporation has bonds on the...Ch. 8 - Valuing Bonds Even though most corporate bonds in...Ch. 8 - Prob. 6QPCh. 8 - Zero Coupon Bonds You find a zero coupon bond with...Ch. 8 - Valuing Bonds Yan Yan Corp. has a 2,000 par value...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Inflation and Nominal Returns Suppose the real...Ch. 8 - Prob. 12QPCh. 8 - Prob. 13QPCh. 8 - Prob. 14QPCh. 8 - Prob. 15QPCh. 8 - Prob. 16QPCh. 8 - Bond Price Movements Miller Corporation has a...Ch. 8 - Interest Rate Risk Laurel, Inc., and Hardy Corp....Ch. 8 - Interest Rate Risk The Faulk Corp. has a 6 percent...Ch. 8 - Bond Yields Hacker Software has 6.2 percent coupon...Ch. 8 - Prob. 21QPCh. 8 - Prob. 22QPCh. 8 - Prob. 23QPCh. 8 - Prob. 24QPCh. 8 - Prob. 25QPCh. 8 - Prob. 26QPCh. 8 - Prob. 27QPCh. 8 - Prob. 28QPCh. 8 - Prob. 29QPCh. 8 - Holding Period Yield The YTM on a bond is the...Ch. 8 - Prob. 31QPCh. 8 - Prob. 32QPCh. 8 - Prob. 33QPCh. 8 - Prob. 34QPCh. 8 - Real Cash Flows Paul Adams owns a health club in...Ch. 8 - FINANCING EAST COAST YACHTS'S EXPANSION PLANS WITH...Ch. 8 - Prob. 2MCCh. 8 - Prob. 3MCCh. 8 - Prob. 4MCCh. 8 - Prob. 5MCCh. 8 - Are investors really made whole with a make-whole...Ch. 8 - After considering all the relevant factors, would...
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
- The "Your Business or Mine" is a manufacturer of high-altitude balloons in Waco, Texas. The company is planning to expand its operations in 2023 and is interested in securing a loan for Tex-Mex National Bank of Waco. Four banks were visited, and their interest rates for the 15-year loan were recorded. As someone knowledgeable about the engineering economy and capital investment justification, which bank would you recommend to this company?arrow_forwardHi Bartleby Expert, I'm having some issues calculating a question in Corporate Finance, and i was hoping you could help me out!"The amount required for the building is $4,000,000,000. Assume Peter receives the amount needed for the construction on January 1st 2022. All the bonds that Peter issues carry an annual interest rate (yield) of 1.7%. Question ACalculate the price on January 1st, 2022, and on January 1st, 2025, for a bullet bond issued at par on January 1st, 2022, paying a coupon once a year until maturity on January 1st, 2028. Assume the yield is constant at 1.7% throughout the life of the bond. Calculate also the total payment, interest payment, and remaining face value on the 1st of January of every year between 2022 and 2028 for this bond."arrow_forwardMosupi is interested in starting a new business and is investigating options for the loan that he would like to secure to get his business off the ground. He consulted his Bank, Madi Bank Limited. Mosupi is interested in obtaining a loan of P 1 500 000.00. Mosupi is investigating two options based on the offer from his bank, obtaining the loan of P1 500 000 at a simple interest rate of 11% to be repaid over 5 years or securing a loan at an interest of 11% compounded annually over five years. Answer the following questions based on the scenario above, (a) How much interest would Mosupi have paid at the end of five years if he opted for simple interest rate? [4 marks] (b) How much interest would Mosupi have paid if interest is compounded annually over five years? [3 marks] (c) Based on your answers to (a) and (b) what would be your advice to Mosupi in terms of the best option to choose? Support your answer using data. [4 marks] (d) Explain any two factors that determine the amount of…arrow_forward
- The "Your Business or Mine" is a manufacturer of high-altitude balloons in Waco, Texas. The company is planning to expand its operations in 2023 and is interested in securing a loan for Tex-Mex National Bank of Waco. Four banks were visited, and their interest rates for the 15-year loan were recorded. As someone knowledgeable about the engineering economy and capital investment justification, which bank would you recommend to this company? Bank A) 1.5% per month compounded monthly Bank B) 16.5% per year compounded continuously Bank C) 4.85% per quarter compounded monthly Bank D) 8.92% per six months compounded semiannuallyarrow_forwardAn investment broker that Ava trusts recommended that she purchase a $50,000, 15-year municipal bond that generates a dividend of 4% per year payable quarterly. She will pay a discounted amount of $45,000 now for the bond. In general, Ava hopes to make 8% per year compounded quarterly on her investments. Using the PW value, determine if this is a financially advantageous investment for her. Solve with factors. The present worth is $ . This a financially sound investment. Need accurate answer and give answer fastarrow_forwardPenny Cassidy is considering forming her own pool service and supply company, Penny's Pool Service & Supply Inc. (PPSS). She has decided to incorporate the business to limit her legal liability. She expects to invest $40,000 of her own savings and receive 1,000 shares of capital. Her plan for the first year of operations forecasts the following amounts at December 31, the end of the year: Cash In bank, $2,900; amounts due from customers for services rendered, $2,300; pool supplies Inventory, $4,600; equipment, $48,000; amounts owed to Pool Corporation Inc., a pool supply wholesaler, $3,500; note payable to the bank, $5,000. Penny forecasts first year sales of $60,000, wages of $24,000, cost of supplies used $8,200, other administrative expenses $4.500, and income tax expense of $4,000. She expects to pay herself a $10,000 dividend as the sole shareholder of the company. Required: If Penny's estimates are correct, what would the following first year financial statements look like for…arrow_forward
- The Case:Hassan Mustafa has recently started his new job as a financial manager in a firm called ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000. To raise the required capital, the company decided to issue bonds. Since ScanSoft had no expertise in issuing and selling bonds, Hassan suggested that the company work with an investment dealer. The investment dealer bought the company's entire bond issue at a discount, and then planned to sell the bonds to the public at face value or the current market value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20 and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi- annually.Hassan Mustafa realized that when the bonds mature on January 20, 2041,…arrow_forwardYour financial advisor from Bluerock recommends you to invest in one of the plan. You want to compare and verify which of the following is the best investment option. Investment Plan A: Deposit $125,000 at the beginning and obtain $175,318.97 after 5 years.Investment Plan B: Deposit $243,000 at the beginning and obtain $319,771.42 after 7 years.Investment Plan C: Deposit $314,000 at the beginning and obtain $530,496.39 after 9 years. 1. Compute interest rate for all 3 plans. Which investment plan provides you the highest rate? 2. Your advisor updated the investment plan information yesterday. While the interest rate did not change for all 3 plans, future values of each investment are 210382.76, 415702.85, 742694.95, respectively. What would be the investment period for each plan? 3. Your advisor thinks it would be a good investment if you make an investment portfolio using all 3 investment plans suggested. He recommends investing in all 3 plans at year 0 and reinvest the money to…arrow_forwardAllen plans to purchase a house in Lindfield this year, the selling price for the house is $3.8 million. Hewants to borrow 80% of the total capital from the bank using a principal and interest loan and pay 30-yearmonthly mortgage payments. CBA bank received his loan application and provided a valuation report basedon current market conditions. However, the bank valuation is conservative, stating the market value is only$3.5 million, and to lower the risk from the bank’s side, it only approves the loan with an LVR (Loan to ValueRatio) of 70% or less.Assuming that Allen wishes to borrow as much as possible from CBA bank, how much will his monthlypayments be for such a mortgage? The current interest rate from CBA is 3.19% P.A. Ignore other costs.arrow_forward
- Mr. Chua in his plan for expansion by putting up a branch of his grocery near Cubao, has decided to take the third option. Incorporating under the business name, “Chua Groceries, Inc. “He figures that he needs a subscribed and paid-up capital of P 100 million to be submitted to the Securities and Exchange Commission (Sec). He has only P 50 million cash in the bank. He invited two close friends to chip in the balance of P 50 million to make up for the balance. Mr. Chua wants to be elected as president and his wife as treasurer of the company. His two friends would be elected vice-president and corporate secretary, respectively. While Mr. Chua, his wife and son, the manager of the planned branch of the grocery store would control the day-to-day operations of the company, he does not feel comfortable with the 50-50 sharing of the capital. What if relations with his two friends turn sour in the future? Aggressive and ambitious that Mr. Chua is, what worries him is if he further…arrow_forwardHi Bartleby Expert, I'm struggling a bit with what my teacher is referring to as an annuity bond (which i assume is just another word for annuity), and i was hoping you could help out!The given information is as follows:Peter needs to build a hotel, the amount required for the building is 4 billion dollars.Assume Peter receives the amount needed for the construction on January 1st 2022. All the bonds that Peter issues carry an annual interest rate (or yield) of 1.7%The question:Consider an annuity bond that matures on January 1st, 2044 and is issued on January 1st 2022. Calculate the total payment and remaining face value on the 1st of January of every year between 2022 and 2028 for this bond.Thank you in advance,- Christianarrow_forwardHassan Mustafa has recently started his new job as a financial manager in a firm called ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000. To raise the required capital, the company decided to issue bonds. Since ScanSoft had no expertise in issuing and selling bonds, Hassan suggested that the company work with an investment dealer. The investment dealer bought the company's entire bond issue at a discount, and then planned to sell the bonds to the public at face value or the current market value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20 and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi- annually. Hassan Mustafa realized that when the bonds mature on January 20, 2041, there…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
BIG Problem with Bond Investing Today!!!; Author: Learn to Invest - Investors Grow;https://www.youtube.com/watch?v=1ScT15of0Vo;License: Standard Youtube License