
Concept explainers
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.
3. The presence of a sinking fund.

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Chapter 6 Solutions
Essentials of Corporate Finance
- Last year Lewis Bank paid an annual dividend of $7 per share. The bank expects the growth of its dividends to be stable at 2% per year going forward. a) If investors require an 8% return, what is the current value of Lewis Bank's stock? (round to nearest cent) b) If the stock currently trades at $124.55 per share, what is the dividend growth rate investors expect? (round to nearest percent)arrow_forwardA food processing company is considering replacing essential machinery. Cost and relevant cash flow details are provided in the table at the right. The company requires an 11% return on its capital. a) What is the present value of the yearly cash flows? Use a Time Value of Money function for full credit. (round to nearest dollar) b) What is the net present value of the project? (round to nearest dollar) c) What is the internal rate of return of the project? Use a Time Value of Money function for full credit. (round to two decimal places)arrow_forwardBarnsa is planning to raise a total of $5,000,000 with a bond issue. Each of the bonds has a face (par) value of $1,000 and coupon rate of 4%. The company's applicable tax rate is 21%. a) What is the annual coupon payment, per bond, that investors expect to receive? b) What is the total after-tax annual interest expense to Barnsa?arrow_forward
- A team of analysts is using a two-stage variable growth model to estimate the value of GNC's common stock. The most recent annual dividend paid by GNC was $4 per share. The analysts expect dividends to increase 7% per year for the next 3 years and then drop to 3% starting in year 4 and remain at that rate for the foreseable future. The required rate of return used for the analysis is 8%. a) What are the expected dividends for the next 4 years? b) What is the value of the stock attributable to the first 3 years of dividends? (use NPV function) c) What is the value of the stock at the end of year 3? (use constant-growth model) Use a cell reference in the numerator to get an unrounded, more precise, answer figure. d) What is the value of the stock attributable to years 4 and beyond? (use pv function, where answer to part C is the fv) e) What is the total value of GNC stock?arrow_forwardAn investor is buying a bond that pays semi-annual interest. The par value is $900 and the coupon rate is 6%. The investor plans to hold the bond to its maturity, which is 5 years from now. If her typical required rate of return is 7%, what is the most the investor should pay for the bond? Use a Time Value of Money function for full credit. (round to nearest cent)arrow_forwardIRR: Mutually exclusive projects Nile Inc. wants to choose the better of two mutually exclusive projects that expand warehouse capacity. The projects' cash flows are shown in the following table: The cost of capital is 18%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X is %. (Round to two decimal places.) Is project X acceptable on the basis of IRR? (Select the best answer below.) Yes No The internal rate of return (IRR) of project Y is %. (Round to two decimal places.) Is project Y acceptable on the basis of IRR? (Select the best answer below.) ○ Yes Ο No b. Which project is preferred? (Select the best answer below.) A. Project X B. Project Y C. Neitherarrow_forward
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- Integrative Risk and valuation Giant Enterprises' stock has a required return of 15.9%. The company, which plans to pay a dividend of $2.22 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2016-2022 period, when the following dividends were paid: a. If the risk-free rate is 6%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. (Hint: Round the computed dividend growth rate to the nearest whole percent.) c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. a. If the risk-free rate is 6%, the risk premium on Giant's stock is %. (Round to one decimal place.) (Round to the nearest cent.) b. Using the constant-growth model, the value of Giant's stock is $ c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. (Select from the drop-down…arrow_forwardBond valuation-Semiannual interest Find the value of a bond maturing in 4 years, with a $1,000 par value and a coupon interest rate of 9% (4.5% paid semiannually) if the required return on similar-risk bonds is 13% annual interest. The present value of the bond is $ (Round to the nearest cent.)arrow_forwardYield to maturity The relationship between a bond's yield to maturity and coupon interest rate can be used to predict its pricing level. For the bond listed below, state whether the price of the bond will be at a premium to par, at par, or at a discount to par. Coupon interest rate 6% Yield to maturity 11% What is the price of the bond in relation to its par value? (Select the best answer below.) ○ A. The bond sells at a discount to par. B. The bond sells at a premium to par. OC. The bond sells at par.arrow_forward
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