Microsoft Word - Case Study 7 Ch 7 S&SCASE STUDY 4 Financing S&S Air’s Expansion Plans with a Bond...

Question

Microsoft Word - Case Study 7 Ch 7 S&SCASE STUDY 4  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 Waen, 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. QUESTIONS 1. The security of the bond—that is, whether the bond has collateral. 2. The seniority of the bond. 3. The presence of a sinking fund. 4. A call provision with specified call dates and call prices. 5. A defeed call accompanying the call provision. 6. A make-whole call provision. 7. Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider. 8. Any negative covenants. Also, discuss several possible negative covenants S&S Air might consider. 9. A conversion feature (note that S&S Air is not a publicly traded company). 10. A floating-rate coupon.

Nitish Lath · Accepted Answer

Solution 1:
The bonds can be secured or unsecured. Secured bonds are having assets pledged which act as a collateral security. In case of collateral bond, if there is any default made by the issuer then the bondholder can claim the amount from collateral. The main advantage of collateral bond is that the collateral bonds are generally having lower rate of coupon as compared to unsecured bonds due to security available whereas the major disadvantage is that company should keep its asset pledged and working in good condition as part of collateral arrangement.
Solution 2:
Seniority refers to preference over other lenders in case of winding up or default. Seniority of the bond is inversely proportion to coupon rate i.e. higher seniority lower coupon rate and vice versa. The major advantage of seniority is issuance of bonds at lower coupon rate and the major disadvantage is restriction of bond covenants from issuing the bond senior to current bond.
Solution 3:
A sinking fund is a negotiable security or money which is kept aside and used for redemption of bonds. The major advantage of sinking funds backed security is that it can be issued at lower coupon rate and attract risk averse investors.

Microsoft Word - Case Study 7 Ch 7 S&S CASE STUDY 4 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....

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment