Mini-Case Analysis #2- Tuxedo Air 1 Mini-Case Analysis # 2 Financing Tuxedo Air’s Expansion Plans with a Bond Issue BUSI 2093 Introduction to Managerial Finance 11/11(18F-O-B) November 17, 2018. Audrey Lowrie
Mini Case Analysis #2 2 Mark Taylor and Jack Rodwell, owners of Tuxedo Air, would like to expand their operations and 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. Ed Cowan, has begun discussions with Suzanne Lenglen, an underwriter from the firm of Raines and Warren, about which bonds Tuxedo Air should consider and what coupon rate the issue will likely have, to best serve their goals of expansion (Ross, et al., 2016). Defining the problem Although Ed Cowan is aware of the bond features, he is uncertain about the costs and benefits of some of the features, not knowing how each feature would affect the coupon rate of the bond issue (Ross, et al., 2016). Suzanne has asked her assistant to prepare a memorandum to Ed describing the effect of each of the following bond features on the coupon rate of the bond. In addition, she has requested her assistant to list all advantages and disadvantages of each of the features: The security of the bond and whether the bond has collateral, The seniority of the bond, The presence of a sinking fund, A call provision with specified call dates and call prices, A deferred call accompanying the call provision, A Canada plus call provision, Any positive covenants and discuss several possible positive covenants Tuxedo Air might consider, Any negative covenants and discuss several possible negative covenants Tuxedo Air might consider, A conversion feature as Tuxedo Air is not a publicly traded company, and A floating-rate coupon (Ross, et al., 2016).The memorandum written to Ed Cowan by Suzanne’s assistant can be found in the appendix. Ed must decide, which bond will yield the highest returns that will help the company pay for the construction of the new expansion project.
Mini Case Analysis #2 3 Alternative Solutions Ed, and Suzanne must decide, which bond features will yield the highest returns. There choices are as follows, security of the bond 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. The decision can include any or all of these bond features, but analysis of each feature will help ascertain the best options. Evaluation and Comparison of Solutions A coupon rate is the annual coupon dividend by the face value of a bond (Ross, et al., 2016) . It is the rate that will be used to determine the periodic interest payments that the bondholder will receive based on the face value of the bond (Ross, et al., 2016). This is
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