Reference no: EM13241522

 

Seasongood & Mayer, established in 1887, is an investment securities firm that engages in the following areas of municipal finance:

1.       Underwriting new issues of municipal bonds

2.       Trading- for example, acting as a market maker for the buying and selling of previously issued bonds.

3.       Investment banking- that is, the process of obtaining money from the capital markets at the lowest possible cost

The major applications of management science at Seasongood& Mayer are in the investment banking area. One particular application involved the use of PERT/CPM in the introduction of a $31 million hospital revenue bond issue.

Scheduling the Introduction of a Bond Issue

In my major building project there are certain common steps:

1.       Defining the project

2.       Determining the cost of the project

3.       Financing the project

The investment banker's role in building projects is to develop the method of financing that will result in the owner's receiving the necessary funds in a timely manner. In a hospital building project, such as the one we will be discussing the typical method of financing is tax-free hospital revenue bonds.

        The construction cost for the building project is an important factor in determining the best approach to financing. Normally, the construction cost is based on a bid submitted by a contractor or a construction manager. However, this cost is usually guaranteed only for a specified period of time, such as 60-90 days.The major function of the financing in such a way that the proceeds of the bond issue can be made available within the time limit of the guaranteed-price construction bid. Since most hospitals must have the proceeds of their permanent long-term financing in hand prior to committing to major construction contracts, the investment banker's role is a significant one.

       To arrange for the financing, the investment banker must coordinate the activities of hospital attorneys, the bond counsel, and so on. The cooperation of all parties and the coordination of project activities are best achieved if everyone recognizes the interdependency of the activities and the necessity of completing individual tasks in a timely manner. Seasongood& Mayer has found PERT/CP, to be useful in scheduling and coordinating such a project.

      As managing underwriter for a $31,050,000 issue of Hospital Facilities Revenue Bonds for Providence Hospital in Hamilton County, Ohio, Seasongood& Mayer used the PERT/CPM critical path procedure to coordinate and schedule the project financing activities. Descriptions of the activities, times required, and immediate predecessors are given in Table 10.10. The project network is shown in Figure 10.17. The critical path activities K-L-M-N-P-Q-R-S-T-U-W resulted in a scheduled project completion time of 29.14 weeks. Specific schedules showing start and finish times for all activities were used to keep the entire project on track. The use of PERT/CPM was instrumental in helping Seasongood& Mayer obtain financing for this project within the time specified in the construction bid.

Questions

1. What is the role of the investment banker in building project?

2. For the hospital project described, what is the primary objective of the investment banker?

3. Perform the critical path calculations for the project network shown in Figure 10.17. Is there more than one critical path? Discuss.