Larissa has decided to expand the company's operations. She has asked Dan to enlist an underwriter to help sell SS0 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Kim McKenzie, an underwriter from the firm of Crowe & Mallard about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of some of them, so he isn't clear on bow each feature would affect the coupon rate of the bond issue. 1. You are Kim's assistant, and she has asked you to prepare a meno to Dan describing the effect of each of the following bood features on the coupon rate of the bond. She would 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 Coast Yachts might consider h. Any negative covenants. Also, discuss several possible negative covenants East Coast Yachts might consider i. A conversion feature (note that East Coast Yachts is not a publicly traded company). 1. A floating rate coupon Larissa has been talking with the company's directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the company's yachts, including engines. Larissa has decided that East Coast Yachts should consider the purchase of an engine manufacturer to allow East Coast Yachts to better integrate its supply chain and get more control over engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan's value. Ragan Engines, Inc., was founded nine years ago by a brother and sister-Carrington and Genevieve Ragan-and has remained a privately owned company. The company manufactures marine engines for a variety of applications. Ragan has experienced rapid growth because of a proprietary technology that increases the fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 150,000 shares of stock. Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered the following information about some of Ragan's competitors that are publicly traded: EPS DPS Stock Price ROE R Blue Ribband Motors Corp. $1.09 .19 $16.32 10.00% 12.0096 Bon Voyage Marine, Inc. 1.26 55 13.94 1 2.00 17.00 Nautilus Marine Engines (27) 57 23.97 NA 16.00 Industry average $.69 $.44 $18.08 11.00% 15.00% Nautilus Marine Engines's negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $2.07. Last year, Ragan had an EPS of $5.35 and paid a dividend to Carrington and Genevieve of $320,000 each. The company also had a return on equity of 21 percent. Larissa tells Dan that a required return for Ragan of 18 percent is appropriate. 1. Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2. Dan has examined the company's financial statements, as well as examining those of its competitors. Although Ragan currently has a technological advantage Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock price? 3. What is the industry average price-earnings ratio? What is Ragan's price-earnings ratio? Comment on any differences and explain why they may exist. 4. Assume the company's growth rate declines to the industry average after five years. What percentage of the stock's value is attributable to growth opportunities? Larissa has decided to expand the company's operations. She has asked Dan to enlist an underwriter to help sell SS0 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Kim McKenzie, an underwriter from the firm of Crowe & Mallard about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of some of them, so he isn't clear on bow each feature would affect the coupon rate of the bond issue. 1. You are Kim's assistant, and she has asked you to prepare a meno to Dan describing the effect of each of the following bood features on the coupon rate of the bond. She would 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 Coast Yachts might consider h. Any negative covenants. Also, discuss several possible negative covenants East Coast Yachts might consider i. A conversion feature (note that East Coast Yachts is not a publicly traded company). 1. A floating rate coupon Larissa has been talking with the company's directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the company's yachts, including engines. Larissa has decided that East Coast Yachts should consider the purchase of an engine manufacturer to allow East Coast Yachts to better integrate its supply chain and get more control over engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan's value. Ragan Engines, Inc., was founded nine years ago by a brother and sister-Carrington and Genevieve Ragan-and has remained a privately owned company. The company manufactures marine engines for a variety of applications. Ragan has experienced rapid growth because of a proprietary technology that increases the fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 150,000 shares of stock. Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered the following information about some of Ragan's competitors that are publicly traded: EPS DPS Stock Price ROE R Blue Ribband Motors Corp. $1.09 .19 $16.32 10.00% 12.0096 Bon Voyage Marine, Inc. 1.26 55 13.94 1 2.00 17.00 Nautilus Marine Engines (27) 57 23.97 NA 16.00 Industry average $.69 $.44 $18.08 11.00% 15.00% Nautilus Marine Engines's negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $2.07. Last year, Ragan had an EPS of $5.35 and paid a dividend to Carrington and Genevieve of $320,000 each. The company also had a return on equity of 21 percent. Larissa tells Dan that a required return for Ragan of 18 percent is appropriate. 1. Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2. Dan has examined the company's financial statements, as well as examining those of its competitors. Although Ragan currently has a technological advantage Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock price? 3. What is the industry average price-earnings ratio? What is Ragan's price-earnings ratio? Comment on any differences and explain why they may exist. 4. Assume the company's growth rate declines to the industry average after five years. What percentage of the stock's value is attributable to growth opportunities