The Financing of ECY Company Larissa, the CEO of ECY Company, Inc., has decided to expand the company's operations. She has asked Dan, the CFO, to enlist an underwriter to help sell $40 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 ECY 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 how each feature would affect the coupon rate of the bond issue. Q1. You are Kim's assistant, and she has asked you to prepare a memo to Dan 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: 1. The security of the bond, that is, whether or not the bond has collateral. 2. The seniority of the bond. 3. The presence of a sinking fund. 4. A call provision with specified call dates and call prices. 5. A deferred call accompanying the above call provision. 6. A make-whole call provision. 7. Any positive covenants. Also, discuss several possible positive covenants ECY might consider. 8. Any negative covenants. Also, discuss several possible negative covenants ECY might consider. 9. A conversion feature (note that ECY is not a publicly traded company). 10. A floating rate coupon. Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM on either bond issue will be 7.5 percent. The coupon bond would have a 7.5 percent coupon rate. The company's tax rate is 35 percent. The Financing of ECY Company Larissa, the CEO of ECY Company, Inc., has decided to expand the company's operations. She has asked Dan, the CFO, to enlist an underwriter to help sell $40 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 ECY 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 how each feature would affect the coupon rate of the bond issue. Q1. You are Kim's assistant, and she has asked you to prepare a memo to Dan 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: 1. The security of the bond, that is, whether or not the bond has collateral. 2. The seniority of the bond. 3. The presence of a sinking fund. 4. A call provision with specified call dates and call prices. 5. A deferred call accompanying the above call provision. 6. A make-whole call provision. 7. Any positive covenants. Also, discuss several possible positive covenants ECY might consider. 8. Any negative covenants. Also, discuss several possible negative covenants ECY might consider. 9. A conversion feature (note that ECY is not a publicly traded company). 10. A floating rate coupon. Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM on either bond issue will be 7.5 percent. The coupon bond would have a 7.5 percent coupon rate. The company's tax rate is 35 percent
