Mini Case Analysis #2 1 MINI CASE ANALYSIS # 2 Tuxedo Air Nick Strilchuk Monday May 14 th , 2017 BUSI 2093 Introduction to Managerial Finance
Mini Case Analysis #2 2 Mark Taylor and Jack Rodwell, owners of Tuxedo Air, have decided to expand their oper- ations ad thus, have instructed their newly hired financial analyst, Ed Cowan, to enlist an under- writer 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 fol- lowing 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.
Mini Case Analysis #2 3 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). The memorandum written to Ed by Suzanne’s assistant can be seen in the appendix in fig 1. The problem lies with Ed and the underwriter Suzanne, using the information provided by Suzanne assistants’ memo, they must decide, which bond will yield the highest returns that will help the company pay for the construction of the new expansion project. Alternative Solutions to the Problem Ed, and Suzanne must decide, which bond features will yield the highest returns. There choices are as follows, security of the bond i.e. with or without collateral, seniority of the bond, a sinking fund, a call provision with specified call dates and call prices, a deferred call, a Canada plus call provision, any positive covenants, other possible positive covenants, any negative covenants, other possible negative covenants, a conversion feature, and a floating-rate coupon.
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