Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 6, Problem 10CC
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 $20 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, 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 as to the costs and benefits of some features, so he isn’t clear on 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.
10. A floating rate coupon.
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 decidedto expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $40 millionin 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 shouldconsider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, heis uncertain as to the costs and benefits of some of them, so he isn’t clear on how each feature wouldaffect 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 disadvantages…
(Computation of Bond Liability) Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%.InstructionsAs the controller of the company, determine the selling price of the bonds.
Sunland Water Company Ltd. needed to raise $69 million of additional capital to finance the expansion of its bottled water facility.
After consulting an investment banker, it decided to issue bonds. The bonds had a face value of $69 million and an annual interest rate
of 4.5%, paid semi-annually on June 30 and December 31, and will reach maturity on December 31, 2034. The bonds were issued at
96.1 on January 1, 2025, for $66,309,000, which represented a yield of 5%.
(b)
Show the journal entry to record the issuance of the bonds. (Credit account titles are automatically indented when amount is entered.
Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List debit entry before
credit entry.)
Account Titles and Explanation
Debit
Credit
Chapter 6 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6.1 - What are the cash flows associated with a bond?Ch. 6.1 - What is the general expression for the value of a...Ch. 6.1 - Is it true that the only risk associated with...Ch. 6.2 - Prob. 6.2ACQCh. 6.2 - Prob. 6.2BCQCh. 6.2 - Prob. 6.2CCQCh. 6.3 - What is a junk bond?Ch. 6.3 - What does a bond rating say about the risk of...Ch. 6.4 - Prob. 6.4ACQCh. 6.4 - What do you think would be the effect of a put...
Ch. 6.5 - Prob. 6.5ACQCh. 6.5 - Prob. 6.5BCQCh. 6.5 - Prob. 6.5CCQCh. 6.6 - Prob. 6.6ACQCh. 6.6 - Prob. 6.6BCQCh. 6.7 - What is the term structure of interest rates? What...Ch. 6.7 - Prob. 6.7BCQCh. 6.7 - What are the six components that make up a bonds...Ch. 6 - Section 6.1What is the coupon rate on a bond that...Ch. 6 - Section 6.2What is the provision in the bond...Ch. 6 - Section 6.3Do bond ratings consider default risk?Ch. 6 - Section 6.4What are the features of municipal...Ch. 6 - Prob. 6.5CCh. 6 - Prob. 6.6CCh. 6 - Prob. 6.7CCh. 6 - Prob. 1CTCRCh. 6 - Prob. 2CTCRCh. 6 - Prob. 3CTCRCh. 6 - Prob. 4CTCRCh. 6 - Prob. 5CTCRCh. 6 - Prob. 6CTCRCh. 6 - Prob. 7CTCRCh. 6 - Prob. 8CTCRCh. 6 - LO3 6.9Bond Ratings. Often, junk bonds are not...Ch. 6 - Crossover Bonds. Looking back at the crossover...Ch. 6 - Municipal Bonds. Why is it that municipal bonds...Ch. 6 - Treasury Market. All Treasury bonds are relatively...Ch. 6 - Prob. 13CTCRCh. 6 - Prob. 14CTCRCh. 6 - Prob. 15CTCRCh. 6 - Prob. 1QPCh. 6 - Interpreting Bond Yields. Suppose you buy a 7...Ch. 6 - Bond Prices. Lycan, Inc., has 7 percent coupon...Ch. 6 - Bond Yields. The Timberlake-Jackson Wardrobe Co....Ch. 6 - Prob. 5QPCh. 6 - Bond Prices. Harrison Co. issued 15-year bonds one...Ch. 6 - Prob. 7QPCh. 6 - Coupon Rates. Volbeat Corporation has bonds on the...Ch. 6 - Prob. 9QPCh. 6 - Prob. 10QPCh. 6 - Nominal and Real Returns. An investment offers a...Ch. 6 - Prob. 12QPCh. 6 - LO2 13PRINTED BY: V.SwathiPpreya@spi-global.com....Ch. 6 - Prob. 14QPCh. 6 - Prob. 15QPCh. 6 - Prob. 16QPCh. 6 - Valuing Bonds. Union Local School District has...Ch. 6 - Bond Price Movements. Bond X is a premium bond...Ch. 6 - LO2 19Interest Rate Risk. Both Bond Bill and Bond...Ch. 6 - Interest Rate Risk. Bond J has a coupon rate of 4...Ch. 6 - Bond Yields. PK Software has 6.3 percent coupon...Ch. 6 - Bond Yields. BDJ Co. wants to issue new 25-year...Ch. 6 - Prob. 23QPCh. 6 - Accrued Interest. You purchase a bond with a...Ch. 6 - Prob. 25QPCh. 6 - Prob. 26QPCh. 6 - Finding the Maturity. Youve just found a 10...Ch. 6 - Prob. 28QPCh. 6 - Prob. 29QPCh. 6 - Prob. 30QPCh. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Prob. 33QPCh. 6 - Prob. 34QPCh. 6 - Prob. 35QPCh. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...Ch. 6 - Financing SS Airs Expansion Plans with a Bond...
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
- please help and explainarrow_forwardSolar Industries develops and produces high-efficiency solar panels. The company has an outstanding $10,000,000, 30-year, 10% bond issue dated July 1, 2011. The bond issue is due June 30, 2040. Some bond indentures require the corporation issuing the bonds to transfer cash to a special cash fund, called a sinking fund, over the life of the bond. Such funds help assure investors that there will be adequate cash to pay the bonds at their maturity date. The bond indenture requires a bond sinking fund, which has a balance of $1,200,000 as of July 1, 2016. The company is currently experiencing a shortage of funds due to a recent acquisition. Bob Lachgar, the company's treasurer, is considering using the funds from the bond sinking fund to cover payroll and other bills that are coming due at the end of the month. Bob's brother-in-law, a trustee of Solar's sinking fund, has indicated a willingness to allow Bob to use the funds from the sinking fund to temporarily meet the company's cash…arrow_forwardP12-47 Describing bonds, journalizing transactions for bonds payable using the straight-line amortization method, and journalizing transactions for a mortgage payable This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. Canyon Canoe Company plans to raise the capital by issuing $210,000 of 7.5%, six-year bonds on January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives $208,476 when the bonds are issued. The company also issues a mortgage payable for $450,000 on January 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $45,000 plus interest…arrow_forward
- What is the interest income on the bond investment for the year 2022? What is the carrying amount of the bond investment on December 31, 2022?arrow_forwardLeague Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $1,400,000 of RoastCo bonds at face value on January 2, 2018. The RoastCo bonds pay interest at the annual rate of 4% on June 30 and December 31 and mature on December 31, 2037. League Up intends to hold the investment until maturity. Requirements 1. Journalize any required 2018 entries for the bond investment. 2. How much cash interest will League Up receive each year from RoastCo? 3. How much interest revenue will League Up report during 2018 on this bond investment? ..... Requirement 1. Journalize any required 2018 entries for the bond investment. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Begin by journalizing League Up's investment on January 2, 2018. Date Accounts and Explanation Debit Credit 2018 Course Chat O Time 1 GB V 19:11 DELLarrow_forwardThomas Company is planning to issue $510,000 of 9%, 15-year bonds payable to borrow for a major expansion. The owner, Frederick Thomas, asks your advice on some related matters. Read the requirements. ..... Requirement 1. Answer the following questions. At what type of bond price will Thomas Company have total interest expense equal to the cash a. interest payments? Face value Under which type of bond price will Thomas Company's total interest expense be greater than the b. cash interest payments? Discount price If the market interest rate is 12%, what type of bond price can Thomas Company expect for the c. bonds? Discount price Requirement 2. Compute the price of the bonds if the bonds are issued at 89. The price of the $510,000 bond issued at 89 is $ 453,900 Requirement 3. How much will Thomas Company pay in interest each year? How much will Thomas Company's interest expense be for the first year? (For this scenario we are assuming that the $510,000 bonds are issued at 89. Further…arrow_forward
- Hello, Can you help with the questions attached, thanks much.arrow_forwardDescribing bonds, journalizing transactions for bonds payable using the straight-line amortization method, and journalizing transactions for a mortgage payable This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. Canyon Canoe Company plans to raise the capital by issuing $210,000 of 7.5%, six-year bonds on January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives $208,476 when the bonds are issued. The company also issues £ mortgage payable for $450,000 on January 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $45,000 plus interest for ten…arrow_forward16 On the last day of its fiscal year ending December 31, 2024, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. 1. Boatright issued 8.00% stated rate bonds with a face amount of $216 million. The bonds mature on December 31, 2041 (20 years). The market rate of interest for similar bond issues was 10.00% (5.00% semiannual rate). Interest is paid semiannually (4.00%) on June 30 and December 31, beginning on June 30, 2025. 2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $53,200 beginning on January 1, 2025. Lease B also is for 10 years, beginning January 1, 2025. Terms of the lease require seven annual lease payments of $64,800 beginning on January 1, 2028. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 10.00% interest rate properly reflects the…arrow_forward
- Your investment department has researched possible investments in corporate debt securities. Among the available investments are the following $100 million bond issues, each dated January 1, 2024. Prices were determined by underwriters at different times during the last few weeks. Company 1. 2. BB Corporation Bond Price $ 109 million Stated Rate 11% DD Corporation $ 100 million 3. GG Corporation $ 91 million 10% 9% Each of the bond issues matures on December 31, 2043, and pays interest semiannually on June 30 and December 31. For bonds of similar risk and maturity, the market yield at January 1, 2024, is 10%. Required: Other things being equal, which of the bond issues offers the most attractive investment opportunity if it can be purchased at the prices stated? The least attractive? Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1. FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Most attractive investment Least attractive investmentarrow_forward2arrow_forwardAs an alternative, you are contemplating to incorporate and issue a bond to raise the capital instead of borrowing from the bank. Required part C Is there an advantage to issuing bonds rather than borrowing money from the bank? Suppose you decide to go this route and you issue a $130,000, 9%, 5-year bonds for $115,375 when the market rate is 12%. The bonds pay interest semi-annually. Prepare an amortization table for the first three payments. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions. July 1, 2021: entry to record issuing the bonds. 31, 2021: entry to record payment of interest to bondholders. 31, 2021: entry to record amortization of premium.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
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