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[answered] 1. If you were Kelly, what would you tell the CFO? 2. Suppo


Write a?conclusion and recommendation (150-300 words)?for the question below: Please use answer provided in the excel sheet to write it.?

The Wolverine Retirement Fund

Question :?Kelly Jones is a financial analyst for Wolverine Manufacturing, a company that produces engine bearings for the automotive industry. Wolverine is in the process of hammering out a new labor agreement with its unionized workforce. One of the major concerns of the labor union is the funding of Wolverine?s retirement plan for its hourly employees. The union believes the company has not been contributing enough money to this fund to cover the benefits it will need to pay to retiring employees. Because of this, the union wants the company to contribute approximately $1.5 million dollars in additional money to this fund over the next 20 years. These extra contributions would begin with an extra payment of $20,000 at the end of 1 year with annual payments increasing by 12.35% per year for the next 19 years. The union has asked the company to set up a sinking fund to cover the extra annual payments to the retirement fund. The Wolverines? CFO and the union?s chief negotiator have agreed that AAA-rated bonds recently issued by three different companies may be used to establish this fund. The following table summarizes the provisions of these bonds.


According to this table, Wolverine may buy bonds issued by AC&C for $847.88 per bond. Each AC&C bond will pay the bondholder $80 per year for the next 15 years, plus an extra payment of $1,000 (the par value) in the fifteenth year. Similar interpretations apply to the information for the IBN and MicroHard bonds. A money market fund yielding 5% may be used to hold any coupon payments that are not needed to meet the company?s required retirement fund payment in any given year. Wolverine?s CFO has asked Kelly to determine how much money the company would have to invest and which bonds the company should buy in order to meet the labor union?s demands.

1. If you were Kelly, what would you tell the CFO?

2. Suppose the union insists on including one of the following stipulations in the agreement:

a. No more than half of the total number of bonds purchased may be purchased from a single company.

b. At least 10% of the total number of bonds must be purchased from each of the companies. Which stipulation should Wolverine agree to?


1. If you were Kelly, what would you tell the CFO?

 

2. Suppose the union insists on including one of the following stipulations in the

 

agreement:

 

a. No more than half of the total number of bonds purchased may be purchased

 

from a single company.

 

b. At least 10% of the total number of bonds must be purchased from each of the

 

companies.

 

Which stipulation should Wolverine agree to? Kelly Jones is a financial analyst for Wolverine Manufacturing, a company that

 

produces engine bearings for the automotive industry. Wolverine is in the process

 

of hammering out a new labor agreement with its unionized workforce. One of the

 

major concerns of the labor union is the funding of Wolverine?s retirement plan for

 

its hourly employees. The union believes the company has not been contributing

 

enough money to this fund to cover the benefits it will need to pay to retiring

 

employees. Because of this, the union wants the company to contribute

 

approximately $1.5 million dollars in additional money to this fund over the next

 

20 years. These extra contributions would begin with an extra payment of $20,000

 

at the end of 1 year with annual payments increasing by 12.35% per year for the

 

next 19 years.

 

The union has asked the company to set up a sinking fund to cover the extra annual

 

payments to the retirement fund. The Wolverines? CFO and the union?s chief

 

negotiator have agreed that AAA-rated bonds recently issued by three different

 

companies may be used to establish this fund. The following table summarizes the

 

provisions of these bonds. According to this table, Wolverine may buy bonds issued by AC&C for $847.88 per

 

bond. Each AC&C bond will pay the bondholder $80 per year for the next 15 years,

 

plus an extra payment of $1,000 (the par value) in the fifteenth year. Similar

 

interpretations apply to the information for the IBN and MicroHard bonds. A

 

money market fund yielding 5% may be used to hold any coupon payments that are

 

not needed to meet the company?s required retirement fund payment in any given

 

year.

 

Wolverine?s CFO has asked Kelly to determine how much money the company

 

would have to invest and which bonds the company should buy in order to meet the

 

labor union?s demands. WolverineRetirement

 

WolverineRetirement Fund

 

Fund Year

 

1

 

2

 

3

 

4

 

5

 

6

 

7

 

8

 

9

 

10

 

11

 

12

 

13

 

14

 

15

 

16

 

17

 

18

 

19

 

20 Coupon Payments

 

Beginning

 

AC&C

 

IBN

 

MicroHard MM Balance

 

$80

 

$90

 

$85

 

$0

 

$80

 

$90

 

$85

 

$28,556

 

$80

 

$90

 

$85

 

$55,946

 

$80

 

$90

 

$85

 

$81,791

 

$80

 

$90

 

$85

 

$105,656

 

$80

 

$90

 

$85

 

$127,035

 

$80

 

$90

 

$85

 

$145,351

 

$80

 

$90

 

$85

 

$159,941

 

$80

 

$90

 

$85

 

$170,044

 

$80

 

$1,090

 

$85

 

$174,793

 

$80

 

$0

 

$85

 

$173,195

 

$80

 

$0

 

$85

 

$164,121

 

$80

 

$0

 

$85

 

$146,282

 

$80

 

$0

 

$85

 

$118,215

 

$1,080

 

$0

 

$85

 

$78,255

 

$0

 

$0

 

$85

 

$456,022

 

$0

 

$0

 

$85

 

$373,406

 

$0

 

$0

 

$85

 

$271,783

 

$0

 

$0

 

$85

 

$148,365

 

$0

 

$0

 

$1,085

 

$0 Coupons

 

Rec'd

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$47,196

 

$458,159

 

$14,319

 

$14,319

 

$14,319

 

$14,319

 

$182,776 Bond Price $847.87 $938.55 $872.29 Bonds

 

Purchased 410.96 0.00 168.46 Minimize:

 

Minimize: D30

 

D30

 

By

 

By Changing:

 

Changing: B28:D28

 

B28:D28

 

Subject

 

Subject to:

 

to: H6:H25>=0

 

H6:H25>=0

 

B28:D28>=0

 

B28:D28>=0 $495,386 (constriants

 

(constriants in

 

in cells

 

cells D32

 

D32

 

stipulation

 

stipulation 11 &

 

& 2)

 

2) Total Purchase Cost stipulation 1 289.709903

 

stipulation 2 57.94 1

 

Buy 411 share of AC&C, 169 share of MicroHard (fractional solution rounded up), Total Cost = $495,8

 

2

 

Cost of stipulation

 

a.

 

$506,590, Cost of stipulaiton b.

 

$500,736 und

 

und

 

12.35%

 

Payment

 

$20,000

 

$22,470

 

$25,245

 

$28,363

 

$31,866

 

$35,801

 

$40,222

 

$45,190

 

$50,771

 

$57,041

 

$64,086

 

$72,000

 

$80,892

 

$90,882

 

$102,106

 

$114,717

 

$128,884

 

$144,801

 

$162,684

 

$182,776 Ending

 

MM Balance

 

$27,196

 

$53,282

 

$77,896

 

$100,624

 

$120,986

 

$138,430

 

$152,325

 

$161,947

 

$166,469

 

$164,948

 

$156,305

 

$139,316

 

$112,586

 

$74,528

 

$434,307

 

$355,625

 

$258,841

 

$141,300

 

$0

 

$0 Minimize:

 

Minimize: D30

 

D30

 

By

 

By Changing:

 

Changing: B28:D28

 

B28:D28

 

Subject

 

Subject to:

 

to: H6:H25>=0

 

H6:H25>=0

 

B28:D28>=0

 

B28:D28>=0

 

(constriants

 

(constriants in

 

in cells

 

cells D32

 

D32 &

 

& D34

 

D34 can

 

can be

 

be added

 

added for

 

for

 

stipulation

 

stipulation 11 &

 

& 2)

 

2) unded up), Total Cost = $495,892

 


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