Problem 20-6 Start with the partial model in the file Ch20 P06 Build a Model.xls

Question

Problem 20-6

Start with the partial model in the file Ch20 P06 Build a Model.xls. on the textbook's Web site. Schumman Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold years ago. Its amortizing $4.5 million floatation costs on the 10% bond over the issue's 30-year life. Shaumman's investment bankers have indicated that the companycould sell a new 22-year issue at an interest rate of 8% in today's market . Neither they or Schumann's management anticipate that interest rate will fall below 6 percent anytime soon, but there is a chance that interest rates will increase.

A. 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?

Explanation / Answer

Entire Bond Refunding Analysis too big to be posted. I would recommend go through the following pdf you will be able to easily do this problem. This pdf is a comprehensive quantitative model for analyzing bond refunding decisions by Lawrence S Tai and Zbigniew H prazasnyski. It is a very comprehensive research paper which will help you understand this concept better www.studyfinance.com/jfsd/pdffiles/v11n2/tai.pdf

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