Bay Path Cranberry Products is a leading producer of cranberry juice, canned cranberry sauce, fresh

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 juice have been declined 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 antioxidants
and other phytonutrients that may protect against heart disease, cancer,
stomach ulsters, gum and urinary tract infections, and even such
age-related afflictions as loss of coordination and memory. These trends
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 oaf certified organic products will be expensive.
Preliminary estimates indicate that Bay Path will need to invest $80
million in production and processing facilities. The company hopes to
finance the expansion by using $30 million of its own liquid assets and
$50 million in new debt in the form of bonds with a maturity if 20
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. Question 1: A company in a lone of
business similar to Bay Path’s recently issued at par noncallable bonds
with a coupon rate of 5.8% and a maturity of 20 years. Moody’s rated the
bonds Aa1 and Standard & Poor awarded them AA. What rate of return
(yield to maturity) did investors require on these bonds if the bonds
sold at par value? Question 2: Bay Path has one outstanding bond issue
with a coupon of 8% that will mature in five years. The bonds now sell
for $1,141.69. What is the yield to maturity on these bonds? You may
want to use a calculator ir spreadsheet in determining your answer. Question 3: Based on your answers to Questions 1 and 2, 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 a possible? (Ignore the
cost of selling the bonds.) Question 4: Suppose Bay Path actually offers
a coupon rate of 6% on its twenty-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 of its required bond yield unexpectedly falls to 5% or
rises to 7%? Question 5: How much money will Bay Path realize from its
$50 million bond issue if the actual yield is either 5% or 7%? (HINT:
Refer to your answers to Question 4 and ignore selling costs.) Question
6: How would the following affect the yield on Bay Path’s newly issued
bonds? a. The bonds are callable b. The bonds are subordinated to Bay
Path’s existing bond issue c. The bond rating is better or worse than
the Moody’s Aa1 that Bay Path anticipates