AmeriCorning manufactures specialty glass products for use in the healthcare industry. The company is planning to expand its operations by building a new facility in Arizona, which will be financed by issuing $600 million in 20-year bonds. The bonds will pay interest at a rate that approximates the return investors will require for new AmeriCorning bonds. The bonds will pay interest twice per year.

 

Required:

1. Identify three or four major pieces of information that investors will use when deciding what return they expect from AmeriCorning bonds at this time. Explain the significance of each.
2. AmeriCorning and its investment bank have agreed that the market will probably demand about a 5.3% return at this time and have set the bond’s coupon rate at 5.5% to make it look attractive to investors. At the time of issuance, however, the market actually demands a return of 8% from this company. Show calculations for the bonds’ issue price given this information.
3. If the company’s estimated return rate of 5.3% had been accurate, how much more or less cash would the bond issue have raised? Explain the difference.