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 converstations 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.

 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 the security of the bond—that is, determine whether the bond has collateral.

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.

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 converstations 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.

 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 a call provision with specified call dates and call prices.

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 conversion feature (note that S&S Air is not a publicly traded 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 converstations 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.

 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 he seniority of the bond.

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.

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.

Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements? Explain your answer.

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.

QUESTION

Using the financial statements provided for S&S Air, determine each of the ratios listed in the table for the light aircraft industry.

On December 31, 2016, Largo, Inc., had a $750,000 note payable outstanding, due July 31, 2017. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing longterm bonds. Because Largo temporarily had excess cash, it prepaid$250,000 of the note on January 12, 2017. In February 2017, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2017. On March 3, 2017, Largo issued its 2016 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, 2016, balance sheet? a.$250,000 b. $750,000 c.$500,000 d. $ 0

Fugate Inc. is considering these two alternatives to finance its construction of a new $2 million plant:

1. Issuance of 200,000 shares of common stock at the market price of$10 per share.
2. Issuance of $2 million, 6% bonds at face value.

Complete the table and indicate which alternative is preferable.

$$\begin{array}{lcc} &\underline{\textbf{Issue Stock}}&\underline{\textbf{Issue Bond}}\\[5pt] \text{Income before interest and taxes}&\text{\$\hspace{1pt}1,500,000}&\text{\$\hspace{1pt}1,500,000}\\ \text{Interest expense from bonds}&\underline{\text{\hspace{50pt}}}&\underline{\text{\hspace{50pt}}}\\ \text{Income before income taxes}\\ \text{Income tax expense (30\\\%)}&\underline{\text{\hspace{50pt}}}&\underline{\text{\hspace{50pt}}}\\ \text{Net income}&\underline{\underline{\text{\$\hspace{45pt}}}}&\underline{\underline{\text{\$\hspace{45pt}}}}\\[3pt] \text{Outstanding shares}&\underline{\text{\hspace{50pt}}}&\underline{\text{\hspace{17pt}700,000}}\\ \text{Earnings per share}&\underline{\underline{\text{\$\hspace{45pt}}}}&\underline{\underline{\text{\$\hspace{45pt}}}}\\ \end{array}$$

The Robinson Corporation has $\$ 43$ million of bonds outstanding that were issued at a coupon rate of $113 / 4$ percent seven years ago. Interest rates have fallen to $10^{3 / 4}$ percent. Mr. Brooks, the vice president of finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was $2.4$ percent of the total bond value. The underwriting cost on the new issue will be $1.7$ percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 9 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole number. Calculate the net present value.

The proper asset allocation for an investor planning for retirement changes dramatically over time. Investors who do not frequently update their asset allocation could be caught in a tragic investment scenario that significantly delays retirement. This is exactly what occurred in 2008, when many investors planning for retirement realized they had not reallocated their portfolios away from stocks and into fixed-income securities over the years, as they should have. Go to money.cnn.com and under the Personal Finance tab, select Calculators. Then choose the Asset Allocation calculator in the Investing category. Calculate an asset allocation for the following two scenarios: A. Need the money: 20 + years How much risk: As much as possible How flexible: If I miss my goal . . . OK During market sell-offs: See an opportunity to buy B. Need the money: 3–5 years How much risk: Not much at all How flexible: I can’t afford to miss my target During market sell-offs: Do nothing How frequently do you think investors should examine their asset allocation? What else should investors review on a periodic basis in addition to asset allocation?

Christine took a world cruise that had a cash price of $23,000 by paying 10% down and financing the balance with a 48- month fixed installment loan. The APR on the loan was 6.0%. Before making the 12th payment , Christine decides to pay off the loan. (a) Determine the original finance charge on the 48-month loan. (b) Determine Christine's monthly payment. (c) If the actuarial method is used, determine the amount of interest Christine will save by paying the loan off early. (d) If the rule of 78s is used, determine the amount of interest Christine will save by paying the loan off early. (e) Which method, the actuarial method or the rule of 78s, is more advantageous to the consumer?