Introduction
Norman Cahill financial vice president of Seminole Gas and Electric is reviewed the minutes of the meeting of the firm’s board of director. The major topic discussed was whether Seminole should refund a $500 million issued of 26 year, 16 percentage, and mortgage bonds issued in 11 months earlier. Three of the board member has taken markedly different positions. The bond has been issued the previous October, when interest rates were at their peak. At that time , Cahill and the board of director thought that interest rates were at a high and would likely decline in the future , but they had no idea that the slump would come so soon and be so sharp. Now, less than a year later, rated utility bonds such as those of Seminole, can be sold to yield only 12.5 percentages. Since Cahill anticipated a decline in interest rates when the $500 million was sold has had insisted that the bonds be made immediately callable. The investment bankers handling the issue wanted Seminole to make the bonds non-callable for a year period, but Cahill resisted this proposal.
Cahill estimated that Seminole could sell a new issue of 25 year bonds at an interest rate of 12.5 percentages. The call of old and sales of new bonds would takes place in about five to seven weeks. Cahill has proposed, at the last director’s meeting that the company call the 16 percentage bonds and refunds them with a new 12.5 percentage issue. Although the refunding cost would be substantial, he believe that the saving of 3.5 percentage of a year for 25 year on a $500 million issued would be well worth the worth the funding cost .Cahill did not anticipated adverse reaction from the other board member but three of them voices strong opposition to the refunding proposal
First was Claude Dykeman, a long term member of the board and the chairman of the Dykeman McClary and, company. This is an investment