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Bond Selection
After Dan’s EFN analysis for East Coast Yachts (see the Closing Case in
Chapter 3), Larissa has decided to expand the company’s operations.
She has asked Dan to enlist an underwriter to help sell $40 million in
new 20-year bonds to finance new construction. Dan has entered into
discussions with Renata Harper, an underwriter from the firm of Crowe
& Mallard, about which bond features East Coast Yachts 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.
2. International
Larissa is confident the company can handle the extra volume with its
existing facilities, but she is unsure about any potential financial risks
of selling its yachts in Europe. In her discussion with Jarek, she found
that the current exchange rate is $0.73/. At this exchange rate, the
company would spend 70 percent of the sales income on production
costs. This number does not reflect the sales commission to be paid to
Jarek.
Larissa has decided to ask Dan Ervin, the company’s financial analyst,
to prepare an analysis of the proposed international sales. Specifically,
she asks Dan to answer the following questions:
1. What are the pros and cons of the international sales plan? What
additional risks will the company face?
3. Ignoring taxes, what are East Coast Yachts projected gains or losses
from this proposed arrangement at the current exchange rate of
$0.73/n? What happens to profits if the exchange rate changes to
$0.80/n? At what exchange rate will the company break even?
4. How could the company hedge its exchange rate risk? What are the
implications for this approach?
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