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Larisa Warren, The Owner of East Coast Yachts, Has Decided

Larisa Warren, The Owner of East Coast Yachts, Has Decided

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Published by ammeluk
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Categories:Business/Law, Finance
Published by: ammeluk on Oct 11, 2009
Copyright:Attribution Non-commercial

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12/07/2009

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Larisa Warren, the owner of East Coast Yachts, has decided to expand her operations.She asked her newly hired financial analyst, Dan Ervin, to enlist an underwriter to helpsell $30 million in new 20-year bonds to finance new construction. Dan has entered intodiscussions with Robin Perry, an underwriter from the firm of Crowe & Mallard, aboutwhich bond features East Coast Yachts should consider and also what coupon rate theissue will likely have. Although Dan is aware of bond features, he is uncertain as to thecosts and benefits of some features, so he isn’t clear on how each feature would affect thecoupon rate of the bond issue.1. You are Robin’s assistant, and she has asked you to prepare a memo to Dan describingthe effect of each of the following bond features on the coupon rate of the bond. Shewould also like you to list any advantages or disadvantages of each feature.a. The security of the bond, that is, whether or not the bond has collateral. b. The seniority of the bond.c. The presence of a sinking fund.d. A call provision with specified call dates and call prices.e. A deferred call accompanying the above call provision.f. A make-whole call provision.g. Any positive covenants. Also, discuss several possible positive covenants East CoastYachts might consider.h. Any negative covenants. Also discuss several possible negative covenants East CoastYachts might consider.i. A conversion feature (note that East Coast Yachts is not a publicly traded company). j. A floating rate coupon.Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds.The YTM on either bond issue will be 8 percent. The coupon bond would have an 8 percent coupon rate. The company’s tax rate is 35 percent.2. How many of the coupon bonds must East Coast Yachts issue to raise the $30 million?How many of the zeroes must it issue?3. In 20 years, what will be the principal repayment due if East Coast Yachts issues thecoupon bonds? What if it issues the zeroes?4. What are the company’s considerations in issuing a coupon bond compared to a zero

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