Assignment on Bond Analysis

Introduction of Bond Analysis

Esbjerg Chemical is a leading distributor of chemicals in Denmark. In the last few years the company has expanded to become of the manufacturers a good network in the region.  The expansion of the company is due to the EU market environment which has been supporting the growth of companies. EC as participated in a joint venture with America chemical distributor. EC needs to raise capital for the purpose of expansion and in order to raise enough capital. CEO Christian Kjeldsen needs to make a critical decision, a decision that cannot hurt the expansion plan and also would not burden the company in the future. The company is required to borrow up to $50 million to support the expansion plan and the money shall be paid within the next few years. The purpose of this report is to present options, which can be considered for the purpose of borrowing, to support the expansion program.

The report, therefore, presents the analysis of the bonds availed to the CEO and the recommendation of the best strategic option which the company should consider.  However, the bonds made available for the CEO Christian to choose from are Eurobond, US dollars and dollar dual currencies. It is important for the CEO to understand the terms and conditions of the loan, mode of repayment and the interest payable for each bond so that the right decision could be made. The paper analyzes the bonds and presents a best option bond which the company can invest on for a better productivity of the company. 

Analysis of the three Bonds available for the CEO Christian to choice

The cash flow of USBOND indicates that the bond shall realize a total of $52.47 in the maturity period of ten (10) years.  This means that if the CEO of Esbjerg decided to borrow 50 million from the JPMorgan Chase & Co which is payable within a period of ten (10) years. It will pay a total of 52.47 million. The interest, therefore, is 2.47 million, which the JPMorgan Chase & Co will earn from a loan of 50 million to Esbjerg Chemical Company (Smith, Smith, & Bliss, 2011).

Below is the annual cost of the US bond. (Chandra, 2011).

The financing decision is one of the most important decisions an organization takes. Because through financing decision not only the organization experience growth but also the profitability of the organization increases significantly (Fridson & Alvarez, 2011).  However, if the organization takes the wrong financing decision than not only the cost of the organization increases but also the organization might have to experience a financial loss. Therefore taking the right financing decision is essential for business success (Pandey, 2015).

The cash flow of Eurobond indicates that the bond shall realize a total of $50.67 in the maturity period of ten (10) years.  This means that if the CEO of Esbjerg decided to borrow 46 million from the Bank of America which is payable within a period of ten (10) years. It will pay a total of 50.67 million. The interest, therefore, is 4.67 million, which the De Danske Bank will earn from a loan of 46 million to Esbjerg Chemical Company (Mulford & Comiskey, 2011).

The cash flow of Dual Currency Eurobond indicates that the bond shall realize a total of 54.74 sterling pounds at the maturity period of ten (10) years.  This means that if the CEO of Esbjerg decided to borrow 46 million from the Bank of America which is payable within a period of ten (10) years. It will pay a total of 52.47 million. The interest, therefore, is 8.74 million, sterling pounds which the Den Danske Bank will earn from a loan of 46 million sterling pounds to Esbjerg Chemical Company (Fridson & Alvarez, 2011).

The organization should not choose this type of bond because it will not meet the financing needs of the organization. The organization will have to pay 8.74 million as interest if the organization will select this bond for financing. The interest rate of dual currency Eurobond is higher than the interest rate of the US bond and Eurobond. In addition, the Eurobond is paying only 50.67 million which is lower than the US bond that is paying 52.47 million.  So it can be said that the overall cost of Dual currency Eurobond is higher than the US bond and if this bond I selected the cost of capital will increase up to a lot of extents (Mulford & Comiskey, 2011).

Recommendation of Bond Analysis

Based on the analysis of the bonds which are availed ion the market for the CEO to choose from, it is appropriate for the CEO to take a loan from JPMorgan Chase & Co. It is noted that JPMorgan Chase & Co agreed to provide a loan of 50 million in terms of the bond, which is payable within 5 years in semi-annual with a coupon of 8.25% at the interest rate of  1.25%. Comparing all the three loans made available, US-bond from JPMorgan Chase & Co is the most affordable and the pay repayment system and the interest is lower. It is recommended for the company to take a 50 million US bond instead of Eurobond and Dual currency bond from Den Danske Bank. This is because of a bond a form of a loan payable within a period of time. Therefore, it should be affordable and payment period which is manageable. The Eurobond and Dual currency bond are expensive based on the interest which is required to be paid after a period of 5 years. Therefore, it is recommended for the company to take the US bond of $50 million for the expansion of business (Mulford & Comiskey, 2011).

Conclusion of Bond Analysis

Summing up all the discussion it is concluded that the analysis of the bonds would be helpful for the company in making the decision on the right bond to choose as a loan for the expansion of the business. The US bond would require an interest of $2.17 to be paid to the JPMorgan Chase & Co for a loan of $50 million and the loan is paid for a period of 10 within 5 years. The Dual currency will accumulate interest of 8.47 million and Eurobond an interest of 4.17 million sterling pounds.

In order to finance the growing needs of the businesses, it is highly important to understand the cost of the capital while making the financing decision (Mohana, 2011).  It is always recommended to the corporation to finance its assets in such a way that the cost of capital remains low. The organization should maintain an optimum capital structure which means that finance the assets of the organization through both debt and equity financing (Smith, Smith, & Bliss, 2011). The organization chooses debt because through this the organization can take tax benefits. The organization should select such bonds whose cost is not higher so that the cost of capital remains low and the organization can meet its objective of financing its expansion needs.

The organization should not choose other types of bonds because it will not meet the financing needs of the organization. The organization will have to pay 8.74 million and 4.67 as interest if the organization will select these bonds for financing. The interest rate of dual currency Eurobond is higher than the interest rate of the US bond and Eurobond. In addition, the Eurobond is paying only 50.67 million which is lower than the US bond that is paying 52.47 million.  So it can be said that the overall cost of Dual currency Eurobond is higher than the US bond and if one of these bonds is selected the cost of capital will increase up to a lot of extents.

References of Bond Analysis

Chandra, P. (2011). Financial Management. Tata McGraw-Hill Education.

Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. John Wiley & Sons.

Mohana, R. P. (2011). Financial Statement Analysis and Reporting. PHI Learning Pvt. Ltd.

Mulford, C. W., & Comiskey, E. E. (2011). The Financial Numbers Game: Detecting Creative Accounting Practices. John Wiley & Sons.

Pandey, I. (2015). Financial Management. Vikas Publishing House.

Smith, J. K., Smith, R. L., & Bliss, R. T. (2011). Entrepreneurial Finance: Strategy, Valuation, and Deal Structure. Stanford University Press.

Warren, C., Reeve, J. M., & Duchac, J. (2016). Financial & Managerial Accounting. Cengage Learning.