Laurinburg Precision Engineering Oliver MacKinnon and Beacham McDougald founded Laurinburg Precision Engineering in 1997 to manufacture precision injection-molded parts for use in medical devices. After an uncertain start up period, the company won contracts from several different manufacturers. Using special machinery and expertise in injection molding of specialty plastics, the company prospered. In early 2004, the company was experiencing a cash crisis caused by rapid growth and the desire to extend capabilities through the acquisition of new molding machines. The partners had no dditional capital to finance the expansions, and they were reluctant to sell equity to anyone else. A s considered, but financial projections indicated the loan could not be paid down for ears Because of prevailing interest rates, local banks were unwilling to make a loan bank loan wa almost f commitment of that duration. Their local bank had introduced MacKinnon and McDougald in Charlotte, North Carolina. After a consultation with MacKinnon and to a small investment banking firm McDougald, Sheila Cox, a partner in the investment banking firm, suggested a $1 million bond issue with a term of five years The bond issue would be secured by the new machinery and placed with private investors. Cox told MacKinnon and McDougald that she expected the bonds would have to be sold to yield almost 10% interest. She proposed setting the interest rate on the bonds at 10%, with semiannual interest payments and the principal due at the end of the fifth year, and she prepared a schedule of the interest and principal repayments that would be due if the bonds were sold to yield i0% interest exactly (see Exhibit 1). Although the proposal seemed to be a reasonable solution to the problem facing MacKinnon and McDougald, both were worried about the semiannual interest payments in the early years. They expected operating cash flows would remain tight as Laurinburg Precision Engineering continued t grow. When they expressed this concern to Cox by telephone, she suggested a second alternative Laurinburg Precision Engineering could issue zero-coupon bonds at the same interest rat e and terms On these bonds no interest payments would be made during the five years the bonds would be utstanding, and all interest and principal would be due on January 15, 2009, when the bonds matured. The principal amount of the zero-coupon bonds would be greater than that of the 10% bonds, but Laurinburg would have five years to prepare to pay interest and principal from either operations or additional financing. Exhibit 1 Schedule of Interest Payments, Interest Expense, and Bond Liability for a 10% Five-year Bond with Semiannual Interest Payments Issued to Yield 10% Interest Interest Principal to be Paid Interest Date Payment Expense Carrying Value 1/15/2004 7/15/2004 1/15/2005 7/15/2005 1/15/2006 7/15/2006 1/15/2007 7/15/2007 $50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 0,000 $50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 $1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 7/15/2008 1/15/2009 $1,000,000 Exhibit 2 Present Value of $1 Period 9709 9615 9524 9434 9346 9259 8573 8264 9426 9246 9070 00 8734 9151 8890 .8985 8548 822779217629 3 8396 8163 7938 7513 73506830 .86388 .8626 8219 7835 7 74737130 6806 6209 .8375 7903 7462 7050 6663 6302 81317599 71076651 62275835 5645 5132 5403 4665 5439 5002 4241 7441 6756 6139 5584 5083 4632 3855 7894 73076768 6 62745820 7664 7026 64465919 5 hnptg Freciston Engineering Exhibit 3 Present Value of Ordinary Annuity of $1 Perlod 3% 4% 5% 6% 7% 8% 10% .9709 .9615 .9524 .9434 .9346 .9259 .9091 1.9135 1.8861 18594 1.8334 1.8080 1.7833 1.7355 2.8286 2.775 2.7232 2.6730 2.6243 2.5771 2.4869 3.7171 3,6299 3.54603.4651 3.3872 3.3121 3.1699 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.7908 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.3553 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 4.8684 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.3349 7.78617.43537.10786.80176.5152 6.2489 5.7590 8.5302 8.11097.72177.36017.0236 6.7101 6.1446 10