Laurinburg Precision Engineering 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 additional capital to finance the expansions, and they were reluctant to sell equity to anyone else. A bank loan was considered, but financial projections indicated the loan could not be paid down for almost five years. Because of prevailing interest rates, local banks were unwilling to make a loan commitment of that duration. Their local bank had introduced MacKinnon and McDougald to a small investment banking firm in Charlotte, North Carolina. After a consultation with MacKinnon and McDougald, Sheila C partner in the investment banking firm, suggested a S1 million bond issue with a term The bond issue would be secured by the new machinery and placed with private investors. Cox old 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 ayments 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 10% interest exactly (see Exhibit 1). seemed to be a reasonable solution to the problem facing MacKinnon and Although the proposal McDougald, both were worried about the semiannual interest payments in the early years. They expected operating cash flows would remain tight as I continued to they expressed this concern to Cox by telephone, she suggested a second altemative. same interest rate and terms. Laurinburg Precision Engineering could issue zero-coupon bonds at the On these bonds no interest outstanding, and all interest and j matured. The principal amount of the zero-coupon bor bonds, but Laurinburg would have five operations or additional financing payments would be made during the five years the bonds would be ncipal would be due on January 15, 2009, when the bonds bonds would be greater than that of the 10% years to prepare to pay interest and principal from either 2. Assume that MacKinnon and McDougald decide to issue bonds to finance the expansion of Laurinburg Precision Engineering. The terms of the $1,000 bonds to due January 15, 2009, specify an interest rate of 10% with semiannual compounding or interest payments. However, Sheila Cox is able to find a group of investors who will accept a yield of 8% interest. How much will the investors be willing to pay for the 10% bonds? Prepare a schedule like Exhibit 1 showing principal, interest payments, interest expense, and amortization of bond premium for these bonds. Why does the bond premium amortize to zero? 3. If zero-coupon bonds with semiannual compounding to be due January 15, 2009, are issued, what will be the amount due on that date if enough bonds are issued to provide $1 million on January 15, 2004, if the investors seek a yield of 8%? Prepare a schedule of interest expense and bond liabilities for each semiannual compounding period. How should Oliver MacKinnon and Beacham McDougald decide which bonds to issue? What factors should they consider? Why? 4. Exhibit 1 Schedule of Interest Payments, Interest Expense, and Bond Liability for a 10%, Five-year Bond with Semiannual Interest Payments Issued to Yield i0% Interest Interest Payment Interest Expense Carrying Value Principal to be Paid 1/15/2004 7/15/2004 1/15/2006 7/15/2005 1/15/2006 7/15/2006 1/15/2007 7/15/2007 1/15/2008 7/15/200B 1/15/200 $50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 $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 $1,000,000 Exhibit 2 Present Value of $1 Period . 9091 97099615 9426 .9246 915188908638 .839681637938 7513 8885 85488227792176297350 6830 8626 8219 7835 74737130 6806 6209 952494349346 9259 9070890087348573 8264 8375 79037462 .8191 .7500 .7107 .0061 .6227 seas s132 7894 7307 7664 7026 446 5010 5430 0024241 676 8274 820 $400 4632 355 10 6756 613055846083 Laurinburg Precision Engineering 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 additional capital to finance the expansions, and they were reluctant to sell equity to anyone else. A bank loan was considered, but financial projections indicated the loan could not be paid down for almost five years. Because of prevailing interest rates, local banks were unwilling to make a loan commitment of that duration. Their local bank had introduced MacKinnon and McDougald to a small investment banking firm in Charlotte, North Carolina. After a consultation with MacKinnon and McDougald, Sheila C partner in the investment banking firm, suggested a S1 million bond issue with a term The bond issue would be secured by the new machinery and placed with private investors. Cox old 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 ayments 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 10% interest exactly (see Exhibit 1). seemed to be a reasonable solution to the problem facing MacKinnon and Although the proposal McDougald, both were worried about the semiannual interest payments in the early years. They expected operating cash flows would remain tight as I continued to they expressed this concern to Cox by telephone, she suggested a second altemative. same interest rate and terms. Laurinburg Precision Engineering could issue zero-coupon bonds at the On these bonds no interest outstanding, and all interest and j matured. The principal amount of the zero-coupon bor bonds, but Laurinburg would have five operations or additional financing payments would be made during the five years the bonds would be ncipal would be due on January 15, 2009, when the bonds bonds would be greater than that of the 10% years to prepare to pay interest and principal from either 2. Assume that MacKinnon and McDougald decide to issue bonds to finance the expansion of Laurinburg Precision Engineering. The terms of the $1,000 bonds to due January 15, 2009, specify an interest rate of 10% with semiannual compounding or interest payments. However, Sheila Cox is able to find a group of investors who will accept a yield of 8% interest. How much will the investors be willing to pay for the 10% bonds? Prepare a schedule like Exhibit 1 showing principal, interest payments, interest expense, and amortization of bond premium for these bonds. Why does the bond premium amortize to zero? 3. If zero-coupon bonds with semiannual compounding to be due January 15, 2009, are issued, what will be the amount due on that date if enough bonds are issued to provide $1 million on January 15, 2004, if the investors seek a yield of 8%? Prepare a schedule of interest expense and bond liabilities for each semiannual compounding period. How should Oliver MacKinnon and Beacham McDougald decide which bonds to issue? What factors should they consider? Why? 4. Exhibit 1 Schedule of Interest Payments, Interest Expense, and Bond Liability for a 10%, Five-year Bond with Semiannual Interest Payments Issued to Yield i0% Interest Interest Payment Interest Expense Carrying Value Principal to be Paid 1/15/2004 7/15/2004 1/15/2006 7/15/2005 1/15/2006 7/15/2006 1/15/2007 7/15/2007 1/15/2008 7/15/200B 1/15/200 $50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 $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 $1,000,000 Exhibit 2 Present Value of $1 Period . 9091 97099615 9426 .9246 915188908638 .839681637938 7513 8885 85488227792176297350 6830 8626 8219 7835 74737130 6806 6209 952494349346 9259 9070890087348573 8264 8375 79037462 .8191 .7500 .7107 .0061 .6227 seas s132 7894 7307 7664 7026 446 5010 5430 0024241 676 8274 820 $400 4632 355 10 6756 613055846083