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Question;Schumann Shoe;Manufacturer is considering whether or not to refund a $70 million, 10%;coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation;costs on the 10% bonds over the issue's 30-year life. Schumann's investment bankers have;indicated that the company could sell a new 22-year issue at an interest rate;of 8 percent in today's market.;Neither they nor Schumann's management anticipate that interest rates;will fall below 6 percent any time soon, but there is a chance that interest rates will increase.;A call premium of 10 percent would be required to retire the old;bonds, and flotation costs on the new issue would amount to $5 million. Schumann's marginal federal-plus-state tax;rate is 40 percent. The new bonds;would be issued 1 month before the old bonds are called, with the proceeds;being invested in short-term government securities returning 5 percent;annually during the interim period.;Perform a complete bond refunding;analysis. What is the bond refunding's NPV?;b. At what interest rate on the new debt is;the NPV of the refunding no longer positive?


Paper#44947 | Written in 18-Jul-2015

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