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Grand Canyon FIN650 module 7 chapter 20 problem

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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 $5 million. Schumann's marginal federal-plus-state tax;rate is 40 percent. The new bonds;would be issued 1 month before the old bonds are called, with the proceeds;being invested in short-term government securities returning 5 percent;annually during the interim period.;Current;bond issue data;Par value;$ 700,00,000;Coupon rate;10%;Original maturity;30;Remaining;maturity;22;Original;flotation costs;$ 45,00,000;Call premium;10%;Tax rate;40%;Refunding data;Coupon rate;8.0000%;Maturity;22;Flotation costs;$ 50,00,000;Time;between issuing new bonds and calling old bonds (months);1;Rate;earned on proceeds of new bonds before calling old bonds (annual);5%;a.;Perform a complete bond refunding analysis. What is the;bond refunding's NPV?

 

Paper#49113 | Written in 18-Jul-2015

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