Question

Laurinburg Precision Engineering Oliver MacKinnon and Beacham McDougald founded Laurinburg Precision Engineering in 1997 to manufacture precision injection-molded parts for use in medical devices. After an uncertain start up period, the company won contracts from several different manufacturers. Using special machinery and expertise in injection molding of specialty plastics, the company prospered In early 2004, the company was experiencing a cash crisis caused by rapid growth and the desire to extend capabilities through the acquisition of new molding machines. The partners had additional capital to finance the expansions, and they were reluctant to sell equity to anyone else bank loan was considered, but financial projections indicated the loan could not be paid down for almost five years. Because of prevailing interest rates, local banks were unwilling to make a loarn commitment of that duration Their local bank had introduced MacKinnon and McDougald to a small investment banking firm in Charlotte, North Carolina. After a consultation with MacKinnon and McDougald, Sheila Cox partner in the investment banking firm, suggested a $1 million bond issue with a term of fiv The bond issue would be secured by the new machinery and placed with private investors. Cox told MacKinnon and McDougald that she expected the bonds would have to be sold to yield almost 10% interest. She proposed setting the interest rate on the bonds at 10%, with semiannual interest payments and the principal due at the end of the fifth year, and she prepared a schedule of the interest and principal repayments that would be due if the bonds were sold to yield 10% interest exactly (see Exhibit 1). rs. Although the proposal seemed to be a reasonable solution to the problem facing MacKinnon and McDougald, both were worried about the semiannual interest payments in the early years. They expected operating cash flows would remain tight as Laurinburg Precision Engineering continued to grow. When they expressed this concern to Cox by telephone, she suggested a second alternative. Laurinburg Precision Engineering could issue zero-coupon bonds at the same interest rate and terms On these bonds no interest payments would be made during the five years the bonds would be outstanding, and all interest and principal would be due on January 15, 2009, when the bonds matured. The principal amount of the zero-coupon bonds would be greater than that of the 10% bonds, but Laurinburg would have five years to prepare to pay interest and principal from either operations or additional financing

Answer 1

3-	present value of zero coupon bond	(future value)/(1+YTM)^n	1000/(1.04)^10	675.56417
	No of zero coupon bonds to be issue	amount required/present value of zero coupon bonds	1000000/675.5642	1480.2442
	date	Interest paid	Interest expense = carrying value *rate    rate = 4%	carrying value= previous value+discount amortized	principal to be paid
	0			1000000
	1	0	40000	1040000
	2	0	41600	1081600
	3	0	43264	1124864
	4	0	44994.56	1169859
	5	0	46794.34	1216653
	6	0	48666.11	1265319
	7	0	50612.76	1315932
	8	0	52637.27	1368569
	9	0	54742.76	1423312
	10	0	56932.47	1480244	1480244
4-	they should consider the liquidity situation of the firm if they are able to pay the coupon payment on time it would be better to issue coupon bonds. MarketInterest rate and maturity of bonds and price of bonds are few factors that should be considered for bond issue.