BUSI 2093 Introduction to Managerial Finance -Mini Case Analysis # 2.docx

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