Write a report in which you explain why a company would want to use bonds to expand its business.

The ABC Company has decided to finance expansion by issuing $10 million worth of 20-year debenture bonds and will ask a number of underwriters to bid on the bond issue.

 

Individual Portion

 

Write a report of 1–2 pages in which you explain why a company would want to use bonds to expand its business. In your report, you must answer the following questions:

  • What considerations will you use in deciding the face value of the bonds?
  • What considerations will you use in deciding the interest rate?
  • What are the different types of bonds that will be offered?
  • Discuss if the bonds must sell at a discount or at a premium, and why?
  • How would the NPV, IRR, payback, discounted payback, and discounted annual cash flows help in management’s decision making?
    • What are the advantages and disadvantages of each and can you use only one to make the decision or do you need to use them all?
    • Assume the following in computing this (the dollar amounts are in millions):
      • Year 0: Cash flow is $(10)
      • Year 1: Cash flow is $ 6
      • Year 2: Cash flow is $7
      • Year 3: Cash flow is $10
      • Discount Factor is 30%

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