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.
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%