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Three page powerpoint needed. Must discuss what effect each option (total of 3) will have on the company’s income statement.
*Existing work is attached for further reference.
>Sheet
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Sheet
| Option 1: Conventional Par Value | ||||||||||||||||||||||||||
| Term | Date | Cash Paid- 4% | Interest Expense | Present Value of Bonds | ||||||||||||||||||||||
| 1/1/ | 0 | 9 | $ 200,000,000.00 | |||||||||||||||||||||||
| 12/ | 3 | $ | 8 | $ 8,000,000.00 | ||||||||||||||||||||||
| 12/31/ | 10 | |||||||||||||||||||||||||
| 12/31/11 | ||||||||||||||||||||||||||
| 12/31/12 | ||||||||||||||||||||||||||
| 5 | 12/31/13 | |||||||||||||||||||||||||
| 6 | 12/31/14 | |||||||||||||||||||||||||
| 7 | 12/31/15 | |||||||||||||||||||||||||
| 12/31/16 | ||||||||||||||||||||||||||
| 12/31/17 | ||||||||||||||||||||||||||
| 12/31/18 | ||||||||||||||||||||||||||
| Totals | $ 80,000,000.00 | |||||||||||||||||||||||||
| Option 2: Zero-percent effectively yielding 6% | ||||||||||||||||||||||||||
| Date | Cash Paid | |||||||||||||||||||||||||
| $ 111,678,955.38 | Formula= F/(1+r)^t | |||||||||||||||||||||||||
| 12/31/09 | ||||||||||||||||||||||||||
| 12/31/10 | ||||||||||||||||||||||||||
| $ 88,321,044.62 | ||||||||||||||||||||||||||
| Option 3: Discounted 1% effectively yielding 5% | ||||||||||||||||||||||||||
| Cash Paid- 1% | Interest Expense- 5% | Amortizied Discount | Unamotized Discount | |||||||||||||||||||||||
| $ 61,774,540.00 | $ 138,225,460.00 | |||||||||||||||||||||||||
| $ 2,000,000.00 | $ 6,911,273.00 | $ 4,911,273.00 | $ 56,863,267.00 | $ 143,136,733.00 | ||||||||||||||||||||||
| $ 7,156,836.65 | $ 5,156,836.65 | $ 51,706,430.35 | $ 148,293,569.65 | |||||||||||||||||||||||
| $ 7,414,678.48 | $ 5,414,678.48 | $ 46,291,751.87 | $ 153,708,248.13 | |||||||||||||||||||||||
| $ 7,685,412.41 | $ 5,685,412.41 | $ 40,606,339.46 | $ 159,393,660.54 | |||||||||||||||||||||||
| $ 7,969,683.03 | $ 5,969,683.03 | $ 34,636,656.43 | $ 165,363,343.57 | |||||||||||||||||||||||
| $ 8,268,167.18 | $ 6,268,167.18 | $ 28,368,489.26 | $ 171,631,510.74 | |||||||||||||||||||||||
| $ 8,581,575.54 | $ 6,581,575.54 | $ 21,786,913.72 | $ 178,213,086.28 | |||||||||||||||||||||||
| $ 8,910,654.31 | $ 6,910,654.31 | $ 14,876,259.40 | $ 185,123,740.60 | |||||||||||||||||||||||
| $ 9,256,187.03 | $ 7,256,187.03 | $ 7,620,072.37 | $ 192,379,927.63 | |||||||||||||||||||||||
| $ 9,618,996.38 | $ 7,618,996.38 | $ 1,075.99 | $ 199,998,924.01 | |||||||||||||||||||||||
| $ 20,000,000.00 | $ 81,773,464.01 | $ 61,773,464.01 |
Sheet2
Sheet3
Memo to Sharon Light, CEO of Light point, Inc
Jan 1
Dear Sharon,
I have determined three possible sources of debt financing that will allow the company to achieve its growth targets. I have been in touch with the Investment bank and a private issuance of bonds is our best bet, as it will save us time and money that would otherwise be incurred if we went the public offering route. If our goal is to raise $200 000 000 of debt capital to expand our operations we have three possible options, 1. We could issue $200 million of 4% 10 year bonds, we would be required to make annual interest payments of $8 000 000 each year, and a $200 000 000 payment in 10 years time dec 31 2018,.
The effects for 2009/2010 and subsequent years would be an Increase in our Long-term Liabilities on our balance sheet; we would receive an Asset (cash) equal to that liability amount. As the market rate and stated rate are equal, the bonds are issued at the par value (no discount/premium). There is a $8 000 000 interest expense each year, that will be reported on the Income statement for 2009, 2010 and all subsequent years until maturity. The $8 000 000 payment will also be reported on our statement of Cash flows as a Financing Activity.
I have determined that over the short term, we should have around $3 000 000/year in excess liquidity that can be used to make bond interest payments, as we are not currently generating much cash flow, or Income I am particularly concerned about being able to make any interest payments so that we do not default on our Debt. $8 000 000 yearly payments is a large risk, and although the effective interest on this option is the lowest of the 3 choices, we will not be able to make the payments on 200 million dollar bonds, at 4%. The most we should borrow is $75 000 000 at 4% interest payments since we only have around $3 million in excess for making interest payments.
Option #2, we issue zero percent term bonds that have an effective rate of 6%, this method although the most expensive of the methods is perhaps the best one to meet the company’s current situation.
We would have a $200 000 000 Long term liability, and would record yearly Interest expense on our Income statement of $12 000 000 in 2009, and $12 720 000 in 2010, with an increase of 6% for interest expense in each of the following years. This expense would also increase the carrying value of our debt each year by 6%, the size of our liability would go from 200 000 000 at jan 1 2009, to 212 000 000 at year end, to 224 720 000 by Dec 31 2010. We would not however be required to make any cash payments there would be no effect on our statement of cash flows, this method is the most expensive, but it will allow us to preserve our cash to expand the company, and once we have done that, we will be able to start paying down the debt.
Option #3 We issue deeply discounted bonds, paying 1% interest each year, 5% effective interest, for 10 years and then on Dec 31 2018 the bonds can be retired. This method will require large yearly Interest payments of $2 000 000 for each of the 10 years until maturity, we will not actually receive $200 000 000 in cash at issuance as they are deeply discounted bonds, we will get around $138 226 121 at issuance in cash, and record a liability for that same amount. We will have $6 911 306 of Interest expense in 2009, $7 156 871 in 2010, with financing cash outflows of $2 000 000 each year for interest on our statement of cash flows. If we need the actual $200 000 000 amount in cash to implement our company expansion then we will need to issue closer to $300 000 000 in bonds at 1% to get $200 000 000 in cash.
I have attached a spread sheet with financial details of each choice, Since we are generating negligible cash I anticipate only around $3 000 000 excess and that amount could be variable after the short term, we can’t really take the risk of paying yearly Interest in case we are unable to make the required payments to bond holders. I recommend option #2, the zero percent bonds, although they will incur the highest rate of interest 6%, we will not actually have to pay anything for 10 years, we will have time to expand the company before any payments are required.
We will record a $200 000 000 Long-term liability, and $200 000 000 in cash on the date of issue, the $200 million will be reported as a cash inflow from Financing activities on our statement of Cash flows for 2009. We will record Interest expense ( non cash) for 10 years the size of the liability will increase on our balance sheet by 6% each year the same amount as Interest expense.
