MINI CASE: INDY CARS LTD. Building on its reputation for manufacturing no-thrills, efficient and affordable automobiles, the Indian car manufacturer Indy Cars Ltd. Is ready to launch an international marketing campaign, specifically targeting low- to medium-income customers in Asia and Europe. In preparation for the expected demand increase, a new production facility will be added in the state of Andhra Pradesh near Hyderabad to complement the already existing plants in Mumbai and New Delhi. The company’s CFO, Raja Jain, is planning to raise the required funds of Indian Rupees (Rs.) 10 billion ($222.4 million) in the form of a 20-year, annual coupon paying corporate bond. The company’s current debt rating with Standard & Poor’s is “A” with a positive outlook, indicating the likelihood of a rating upgrade to AA in the near future. In that case, the market’s required rate of return could drop by as much as 75 basis points from 6.80 per cent to 6.05 per cent. Mr Jain is wondering if the bond should be issued at a premium or a discount and if the company should offer a fixed or floating rate or, instead of making explicit interest payments, issue a zero-coupon bond instead. Each bond will have a normal value of Rs. 1,000. The intended issue date is 1 July 2021. Your job is to: QUESTIONS 1. Advice Mr Jain on the impact of the following set of bond features and characteristics on the cost of debt: sinking fund, asset-backing, seniority, conversion feature, call provision, and a put provision. 2. Compute the expected issue price based on a required rate of return of 6.8 per cent for: a. a fixed annual interest payment of Rs. 64 per bond. b. a fixed annual interest rate of Rs. 72 per bond. c. Does your answer to a and b change if semi-annual interest payments of Rs. 32 and Rs. 36 respectively are made? Is so, why? d. d.A zero-coupon bond 3. Recompute your results of 2 a,b and c assuming an upgrade in the company’s credit rating and determine the impact on the expected issue price. 4. Explain to Mr Jain if investors would prefer a floating rate bond and why?
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