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CUFF should recommend to the board to go with option 2.

E Chief Financial Officer of Merit Enterprise


Corp. has two options that she can recommend to the board. Lets take a look at option 1. Pros: We
already know that Morgan Chase bank has served Merit for many years. The $4 billion loan can come
quickly from Comparing Chase by gathering a group of banks together. As an Investment bank it can help
Merit raise capital, and engage in trading and market making activities. Because of their good
relationship with the bank merit can negotiate to obtain a low interest rate. The business will stay
private. The cons:

Morgan has served with Merit for many years with seasonal credit lines as well as a medium-term loan.
Depending on how business goes they may need a long-term loan. Since the loans will come from
different banks if the business does not produce enough cash flow there may be a chance for
bankruptcy. Comparing will have the upper hand in their finances by demanding periodic financial
disclosures to monitor Merit’s financial conditions while their operation is increasing. The bank may lay
down certain restrictions that can affect future financing.

Since $4 billion is a large non the bank may require collateral. If the business doesn’t do so well they may
use that to control assets and sell it for profit to make up for what they owe. Lastly failure to pay back
the loan can result in a lawsuit, which can be the worst possible outcome. Pros and Cons of Borrowing
Money from a Financial Institute) Option 2: Pros – Merit is known to have excellent financial
performance throughout the years. Many investors may be willing to participate in stock offered by
Merit.

If many people are Milling to invest Merit can reach its goal of $4 billion quickly. He more shares of stock
the investors own more dividends will come when the company makes a profit. This will give the
company more equity. Even if the company doesn’t do so well the risk will lie on the investors and not so
much on Merit. Cons – Merit will become a public company, which will have them face extensive
disclosure requirements and other regulations. It may also be a d process to find enough people who
willing to invest the $4 billion dollars in a quick amount of time.

When issuing stock, investors can purchase shares, which will give hem an equal portion of ownership in
the company. Shareholders will constantly Ant to know what’s going on within the business. This may
impact Merit’s Judgment on certain business decisions to keep investors happy. Must also be cautious if
someone comes along and buy the majority of the shares that may cause Merit to lose control of their
company. (Pros ; Cons of Selling Stock in Your Business) The best option should be number two. You
always want to try to avoid loans from banks because it may cause Merit to go into debt.
This is not a loan too house but too business that needs $4 billion dollar. If the business doesn’t do so
well it will cause stress. Even though going with option one will keep the company private I would
actually want Merit to go public. By increasing visibility it will attracts investors, Inch will not put Merit in
financial strain on loans. When you issue stock, there is no limit on how much money you could
potentially raise. If you have a solid business concept behind you, you might be able to find many
investors who want to give you money.

Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5
years ago at their

$1,000 par value and have exactly   25 years remaining until they mature. They have an 8.0%
coupon interest rate, are convertible into

50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's.
Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company
that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are
considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation,
currently at 5.0% annually, is likely to increase to a

6.0% annual rate.

Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change,
and maturity risk. To get a feel for the potential impact of these factors on the bond value, she decided
to apply the valuation techniques she learned in her finance course.

To Do

a. If the price of the common stock into which the bond is convertible rises to

$30.00 per share after


5 years and the issuer calls the bonds at

$1,080.00, should Annie let the bond be called away from her or should she convert it into common
stock?

b. For each of the following required returns, calculate the bond's value, assuming annual interest.
Indicate whether the bond will sell at a discount, at a premium, or at par value.

(1) Required return is

6.0 %

(2) Required return is

8.0 %

(3) Required return is

10.0 %

c. Repeat the calculations in part (b), assuming that interest is paid semiannually and that the
semiannual required returns are one-half of those shown. Compare and discuss differences between the
bond values for each required return calculated here and in part (b) under the annual versus semiannual
payment assumptions.

d. If Annie strongly believes that expected inflation will rise by


1.0% during the next few months, what is the most she should pay for the bond, assuming annual
interest?

e. If the Atilier bonds are downrated by Moody's from Aa to A, and if such a rating change will result in
an increase in the required return from

8.0% to

8.75%, what impact will this have on the bond value, assuming annual interest?

f. If Annie buys the bond today at its

$1,000 par value and holds it for exactly

3 years, at which time the required return is

7.0%, how much of a gain or loss will she experience in the value of the bond (ignoring interest already
received and assuming annual interest)?

g. Rework part (f), assuming that Annie holds the bond for

10 years and sells it when the required return is

7.0%. Compare your finding to that in part (f), and comment on the bond's maturity risk.

h. Assume that Annie buys the bond at its current price of


$983.80 and holds it until maturity. What will her current yield and yield to maturity (YTM) be, assuming
annual interest?

i. After evaluating all of the issues raised above, what recommendation would you give Annie with regard
to her proposed investment in the Atilier Industries bonds?

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