AmeriCorning manufactures specialty glass products for use in the healthcare industry. The company is planning to expand
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Question:
AmeriCorning manufactures specialty glass products for use in the healthcare industry. The company is planning to expand its operations by building a new facility in Arizona, which will be financed by issuing $600 million in 20-year bonds. The bonds will pay interest at a rate that approximates the return investors will require for new AmeriCorning bonds. The bonds will pay interest twice per year.
Required:
- Identify three or four major pieces of information that investors will use when deciding what return they expect from AmeriCorning bonds at this time. Explain the significance of each.
- AmeriCorning and its investment bank have agreed that the market will probably demand about a 5.3% return at this time and have set the bond’s coupon rate at 5.5% to make it look attractive to investors. At the time of issuance, however, the market actually demands a return of 8% from this company. Show calculations for the bonds’ issue price given this information.
- If the company’s estimated return rate of 5.3% had been accurate, how much more or less cash would the bond issue have raised? Explain the difference.
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
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