Mini Case #4 from Fundamentals of Corporate Finance (Ross) 9th edition Mark Sext
ID: 2754917 • Letter: M
Question
Mini Case #4 from Fundamentals of Corporate Finance (Ross) 9th edition
Mark Sexton and Todd Story, the owners of S&S; Air, have decided 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 discussions with Kim McKenzie, 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 Kim'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: The security of the bond-that is, 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 make-whole call provision. Any positive covenants. Also, discuss several possible positive covenants S&S; Air might consider. Any negative covenants. Also, discuss several possible negative covenants S&S; Air might consider. A conversion feature (note that S&S; Air is not a publicly traded company). A floating-rate coupon.Explanation / Answer
Payback period
The cashflow gets recovered between 4 & 5 years
PBP = 4 years + 35000000/210000000 = 4.17years
For IRR, the PV of inflows = PV of ouflows
Equating above we get, IRR = 16.04%
NPV calculation is given above
Since, NPV is positive, fhe company should opt for the mine project.
Year Cash flow Cumulative cashflow PV @ 12% 0 -600000000 -600000000 -600000000 1 75000000 -525000000 66964285.71 2 120000000 -405000000 95663265.31 3 160000000 -245000000 113884839.7 4 210000000 -35000000 133458796.5 5 240000000 205000000 136182445.4 6 160000000 365000000 81060979.39 7 130000000 495000000 58805397.99 8 90000000 585000000 36349490.52 9 -95000000 490000000 -34257952.37 NPV 88111548.04