XYZ company wants to open a new manufacturing facility. The ideal scenario for the company would be to purchase a property and invest in new equipment instead of transferring or moving older existing equipment. The senior management is concerned with over utilizing to much cash from reserve. The concern is that the company will over extend with a cash investment and then not have operational cash on hand. As a result, the CEO has asked the accounting group to formulate a plan to raise the capital to open the new facility.

1. How would you structure the liability that is needed to open the new facility (hint: part will be a bond and part will be something else)?

2. Assume that the market interest for bonds is 3% and the company is in the process of issuing a 2% bond. What type of bond would this then become?

3. What do you think the biggest advantage to the method that you have selected? What is the biggest disadvantage?