A firm is considering the refunding of a $60 million, 16% coupon, 30- year bond
ID: 2712275 • Letter: A
Question
A firm is considering the refunding of a $60 million, 16% coupon, 30- year bond issue that was sold 5 years ago; there were $3 million in flotation costs. The firm's investment bank has indicated that the firm could sell a new 25-year issue at 13%. A call premium of 16% would be required to retire the old bonds and flotation costs on the new issue would be $3 million. The new bonds would be issued 1 month before the old bonds were called with the proceeds being invested in short-term government securities earning 10% annually during the interim period. The firm's tax rate is 40%. Perform a refunding analysis and find the NPV of the refunding. Should the firm refund? Why or why not?
Explanation / Answer
Firm Should Refund as the NPV is Postive
Current bond issue information Par value $ 6,00,00,000 coupon rate 16% original maturity 30 remaining maturity 25 original flotation costs $ 30,00,000 Call premium 16% Tax rate 40%Related Questions
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