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One year ago Copest Inc., issued $100 million of 11-year bonds with a 9% coupon

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One year ago Copest Inc., issued $100 million of 11-year bonds with a 9% coupon, payable annually. The first couponpayment has just been paid. The bonds are callable at 103 beginning today. Floatation costs on that issue were $1 million.Copest has a 34% marginal tax rate.:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />;Since interest rates have fallen, Copest is considering calling in the bonds and refinancing at current rates. It has two,ten-year, financing altematives.;1) A $100 million public issue of 8% annual coupon bonds. Flotation costs would be $1 million.;2) An 8%, $100 million private placement with semi-annual coupons. There would be a front-end placement fee of$250,000.;Note: Call premiums and interest payments are tax deductible. However, front-end fees and floatation costs must be capitalized andamortized over the life of the bond.;Questions;a) Calculate the effective cost of raising funds from the public bond issue. Use the IRR;procedure for all your calculations.;b) Calculate the effective cost of raising funds from the private placement of debt.;c) If Copest does call in the bonds, which of the two refinancing alternatives is preferable?;d) What is the effective, after-tax cost of leaving the existing bonds in place?;In other words, what would be the after-tax ali-in cost of refinancing that would make Copest indifferent between callingthe bonds and leaving them in place?;e) Should Copest call in the bonds?

 

Paper#18820 | Written in 18-Jul-2015

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