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Chapter 18 Pb 8

In: Business and Management

Submitted By NumberOneDad
Words 440
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Bob Technologies is considering whether or not to refund a $75 million, 12% coupon,
30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12% bonds over the issue's 30-year life. Bob's investment banks have incidicated that the company could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they bor Bob's management anticipate that interest rates will fall below
10% any time soon, but there is a chance that rates will increase. a call premuim of 12% would be required to retire the old bonds, and floatation cost on new bond issue would amount to $5 million. Bob's margainal fed+State tax rate is 40%. The new bonds would be issued one month before the old bonds are called, with proceeds being invested in short-term gov securities returning 6% annually during interuim period. a) Perform a complete bond refunding analysis. What is the bond refunding's NPV? b) What factors would influence Bob's decision to refund now rather than later? Current bond issue information
Par value $75,000,000 coupon rate 12% original maturity 30 remaining maturity 25 original flotation costs $5,000,000
Call premium 12%
Tax rate 40%

New issue information
Coupon rate 10.0% maturity 25 flotation costs $5,000,000 Time between issues (months) 1 rate on surplus funds (annual) 6% a. Perform a complete bond refunding analysis. What is the bond refunding's NPV? Initial investment outlay to refund old issue:
Call premium on old issue = 9,000,000.00
After-tax call premium = 5,400,000.00
New…...

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