The Campus in Beaverton, Oregon is home to Nike’s World Headquarters. In addition to a number of architecturally beautiful office buildings, such as Steve Prefontaine Hall, Tiger Woods Center, and the Michael Jordan Building, the campus also has an employeewellness center named after the famous Bo Jackson. The center and accompanying field are used for employee fitness classes, product testing, and sponsored athlete workouts. Due to a savings of nearly $150,000 per year on field maintenance by replacing the natural grass that accompanies the Bo Jackson wellness center with artificial field turf, the Nike managerial teamis proposing to replace the current natural grass field with a field turf surface. Although the Nike managerial team is convinced that field turf is the correct choice to make, they are unsure of how to finance the required initial start-up costs of $1,000,000. As a result, they have contacted you to receive guidance on this important and potentially difficult financing problem. The situation is as follows:
The Nike managerial team has access to three sources of financing:
General funds from previous year’s profits (retained earnings), maximum allowance = $200,000.
Approval to issue a bond package, no more than $550,000 maximum.
Approval to take out a maximum of $450,000 in direct loans from a local bank.
Your task is to determine a financing package that makes the most sense. How much retained earnings should they use? How many bonds should they issue? How much should they finance with direct loans? Your task includes three parts:
(1) Determine the amounts of retained earnings, bonds, and direct loans to take out
(2) Price out the annual debt service for the financing package you’ve created (i.e., create an amortization schedule for the loan and a bond payment schedule for the bond package). What will the annual payment amount be for the upcoming years?
(3) Write a persuasive discussion of why this financing mix is an optimal solution. Remember if you choose to use retained earnings, your discussion should include information about opportunity costs. (3-7 sentences).
Only the original material, installation, and first year maintenance should be included in your financial needs assessment. The annual maintenance in the future will be covered by general operational revenues, and will not require additional financing. Your financing mix should be determined (and turned in) using excel. You’ll be graded based on completion, accuracy, and logical reasoning. The assignment can be completed in pairs or groups of three. (worth 5 pts)
Bond Package Details:
Par value - $1,000 ($550k max)
Coupon Value - 4%
Yield - 6%
Length - 10 years
Retained Earnings:
Maximum Amount - $200,000
Interest Rate - 0.00
Payment Amount - 0.00
Opportunity Costs - Substantial
- Use of retained earnings are awarded based on competitive grounds. Request must persuade a funding committee of need, usefulness, and appropriateness of project.
Interest paid out annually
Bank Loan Details:
Maximum Amount - $450,000
Interest Rate - 6.5%
Interest Compounded - Monthly
Length - 5 years
Payments due monthly
Bonus Section:
Now flip the script. Say you are now an investor looking to purchase bonds as a part of your investment portfolio. At what price would you be willing to purchase the bonds described above? (worth 1 extra credit point)