Bay Path Cranberry Products is a leading producer of cranberry juice, canned cranberry sauce, fresh berries, and sweetened dried cranberries, with

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Bay Path Cranberry Products is a leading producer of cranberry juice, canned cranberry sauce, fresh berries, and sweetened dried cranberries, with production and processing facilities in Massachusetts and Wisconsin. Sales of traditional products such as fresh berries and canned cranberry sauce have been declining for a long time. The fastest-growing products have been juices and dried fruit, especially “light” and sugar free juices. Industry-sponsored advertising has highlighted research showing that cranberries are rich in antioxidant and other phytonutrients that may protect against heart disease, cancer, stomach ulcers, gum, and urinary tract infections, and even such age-related afflictions as loss of coordination and memory.

These trend confirm the marketing department’s belief that Bay Path should aggressively pursue the same health-conscious consumers who purchase certified organic products. Despite the growing popularity of organic food products and the demonstrated willingness of affluent consumers to pay a premium price for them, the cranberry industry has been slow to enter the field. Bay Path executives have now decided to introduce an organic line of products, starting with juice and blended juice. This new line will become their highest strategic priority for the next two years.

The introduction of certified organic products will be expensive. Preliminary estimates indicate that Bay Path will need to invest $100 million in production and processing facilities. The company hopes to finance the expansion by using $40 million of its own liquid assets and $50 million in new debt in the form of bonds with a maturity of 30 years. Bay Path expects the bonds to receive a rating of Aa1 or better from Moody’s.

For all questions, assume par value is $1,000 and semi-annual bond interest payment.

2.1 QUESTION 1

A company in a line of business similar to Bay Path’s recently issued at par with a coupon rate of 5.8% and a maturity of thirty years. The bonds were rated Aa1 by Moody’s and AA by Standard & Poor’s. What rate of return (yield to maturity) did investors require on these bonds if the bonds sold at par value?

2.2 QUESTION 2

Bay Path has one outstanding bond issue with a coupon of 7% that will mature in five years. The bond now sells for $1,141.69. What is the yield to maturity on these bonds? You may want to use a financial calculator to determine your answer.

2.3 QUESTION 3

Based on your answers to Questions 1 and 2 above, what coupon rate should Bay Path offer if it wants to realize $50 million from the bond issue and sell the bonds as close to par value as possible (ignore the cost of selling the bonds)?

2.4 QUESTION 4

Suppose Bay Path actually offers a coupon rate of 7% on its thirty-year bonds, expecting to sell the bonds at par. What will happen to the price of a single bond with a par value of $1,000 if the required yield on the bonds unexpectedly falls to 5% or rises to 9%?

2.5 QUESTION 5

How much money will Bay Path realize from its $50 million bond issue if the actual yield is either 5% or 9%? Refer to your answers to Question 4 and ignore selling costs.

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