10 Jun WHAT CONSIDERATIONS WILL YOU USE IN DECIDING THE INTEREST RATE?
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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