Reference no: EM131501077
SINKING FUND The Vancouver Development Company (VDC) is planning to sell a $100 million, 10-year, 12%, semiannual payment bond issue. Provisions for a sinking fund to retire the issue over its life will be included in the indenture. Sinking fund payments will be made at the end of each year, and each payment must be sufficient to retire 10% of the original amount of the issue. The last sinking fund payment will retire the last of the bonds. The bonds to be retired each period can be purchased on the open market or obtained by calling up to 5% of the original issue at par, at VDC’s option.
a. How large must each sinking fund payment be if the company (1) uses the option to call bonds at par or (2) decides to buy bonds on the open market? For Part (2), you can only answer in words.
b. What will happen to debt service requirements per year associated with this issue over its 10-year life?
c. Now consider an alternative plan where VDC sets up its sinking fund so that equal annual amounts are paid into a sinking fund trust held by a bank, with the proceeds being used to buy government bonds that are expected to pay 7% annual interest. The payments, plus accumulated interest, must total $100 million at the end of 10 years, when the proceeds will be used to retire the issue. How large must the annual sinking fund payments be? Is this amount known with certainty, or might it be higher or lower?
d. What are the annual cash requirements for covering bond service costs under the trusteeship arrangement described in Part c? Assume level interest rates for purposes of answering this question.
e. What would have to happen to interest rates to cause the company to buy bonds on the open market rather than call them under the plan where some bonds are retired each year?
|
Company recognizes a long-term capital gain
: Jay owns 100% of Kaye Company. In 2011, Kaye Company recognizes a long-term capital gain (LTCG) of $100,000.
|
|
Recommend two desired characteristic of a board of directors
: From the mini case, recommend two desired characteristics of a board of directors. Provide a rationale for your response.
|
|
Trolley problem relate to the ethics of self-driving cars
: According to the author, how does the "Trolley Problem" relate to the ethics of self-driving cars?
|
|
Lower bound of european put option prices
: [Lower Bound of European Put Option Prices] Suppose that:
|
|
Sinking fund-decides to buy bonds on the open market
: SINKING FUND-uses the option to call bonds at par or decides to buy bonds on the open market?
|
|
Examine regulatory and credibility issues in accounting
: Examine regulatory, ethical, and credibility issues in accounting. Integrate accounting theories, models, and practices across the organization.
|
|
Write site visit to national biscuit industries ltd
: Write site visit to National Biscuit Industries Ltd SAOG in Oman. Identify the rationale behind making site visits and writing up the site report
|
|
European call option price and put option price
: European call option price (c), European put option price (p), spot price (S0), strike price (K), risk-free rate
|
|
Why do some companies have two classes of stock
: Why do some companies have two classes of stock? What is the indenture? What are protective covenants? Give some examples.
|