S Air’s Expansion Plans with a Bond Issue
S Air was
Financing SS Air’s Expansion Plans with a Bond Issue
SS Air was
founded 10 years ago. The company has manufactured and sold light airplanes over this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models: The Birdie, which sells for $53,000, and the Eagle, which sells for $78,000. SS Air is not publicly traded, but the company needs new funds for investment opportunities. Mark Sexton and Todd Story, the owners of SS Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $20 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Crowe Mallard, about which bond features SS Air should consider and what coupon rate the issue will likely have.
Although Chris is aware of the bond features, he is uncertain as to the costs and benefits of some features, so he isn’t clear on how each feature would affect the coupon rate of the bond issue. Describe the effect of each of the following bond features on the coupon rate of the bond. Also list any advantages or disadvantages of each feature.
The security of the bond—that is, whether the bond has collateral.
The seniority of the bond.
The presence of a sinking fund.