Mark Sexton and Todd Story, the owners of S&S Air, have planned to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into conversations with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

&emsp: Although Chris is aware of the bond features, he is 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. 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.

QUESTION

Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider.

A make-whole call provision.

A deferred call accompanying the call provision.

Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to assess the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then.

 S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models; the Birdie, which sells for $53,000, and the Eagle, which sells for$78,000.

 Although the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company can complete the manufacture of an airplane in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed.

 Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry.

QUESTIONS

Mark and Todd agree that a ratio analysis can provide a measure of the company’s performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or why not? There are other aircraft manufacturers S&S Air could use as aspirant companies. Comment whether it is appropriate to use any of the following companies: Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.

Mark Sexton and Todd Story, the owners of S&S Air, have planned to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into conversations with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

&emsp:Although Chris is aware of the bond features, he is 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. 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.

QUESTION

A deferred call accompanies the call provision.

If the learning phenomenon applies to all human activity, why isn’t the effect noticeable in mass production or high-volume assembly work?

Heginbotham Corp. issued 20-year bonds two years ago at a coupon rate of 5.3%. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, determine the YTM.

Are there any instances under which an investor might be more concerned about the nominal return on an investment than the real return?

Define the Fisher effect.

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,250 monthly. The contract currently sells for$245,000. What is the monthly return on this investment vehicle? What is the APR? The effective annual return?

What is the difference between a nominal and a real return? Which has more importance to a typical investor?

How does a bond issuer choose the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

Kristina just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $62 million, to receive 10 end-of-year payments of$9.5 million, or to receive 30 end-of-year payments of $5.6 million. a. If she thinks she can earn 7% annually, which should she choose? b. If she expects to earn 8% annually, which is the best choice? c. If she expects to earn 9% annually, which option would you recommend? d. Explain how interest rates influence her choice.

Mark Sexton and Todd Story, the owners of S&S Air, have planned to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into conversations with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

&emsp:Although Chris is aware of the bond features, he is 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. 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.

QUESTION

A make-whole call provision.