Mini Case Analysis #2
2
The owners of Tuxedo Air - Mark Taylor and Jack Rodwell, have decided to expand their
operations ad thus, have instructed their newly hired financial analyst, Ed Cowan, to enlist an
underwriter to help sell $35 million in new 10-year bonds to finance construction for the
expansion (Ross, Westerfield, Jordan, & Biktimirov, 2016).
Ed, has begun discussions with
Suzanne Lenglen, an underwriter from the firm of Raines and Warren, about which bond features
Tuxedo Air should consider and what coupon rate the issue will likely have, to best serve their
goals of expansion (Ross, et al., 2016).
Define the problem
Although Ed is aware of the bond features, he is however, 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 (Ross, et al., 2016).
Therefore, Suzanne has asked her assistant to prepare a memo to
Ed describing the effect of each of the following bond features on the coupon rate of the bond.
In addition, she has asked her assistant to list any advantages or disadvantages of each of the
following features:
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 deferred call accompanying the call provision.
6.
A Canada plus call provision.
7.
Any positive covenants. Also, discuss several possible positive covenants Tuxedo Air
might consider.
8.
Any negative covenants. Also, discuss several possible negative covenants Tuxedo Air
might consider.
9.
A conversion feature (note that Tuxedo Air is not a publicly traded company).
10. A floating-rate coupon (Ross, et al., 2016).
