The Wagner Corporation has a $23 million bond obligation outstanding, which it is considering refunding. Though...

 

 

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The Wagner Corporation has a $23 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 15 percent, the interest rates on similar issues have declined to 12.1 percent. The bonds were originally issued for 20 years and have 16 years remaining. The new issue would be for 16 years. There is a 8 percent call premium on the old issue. The underwriting cost on the new $23 million issue is $580,000, and the underwriting cost on the old issue was $430,000. The company is in a 34 percent tax bracket, and it will allow an overlap period of one month (1/12 of the year). Treasury bills currently yield 5 percent. (Do not round intermediate calculations. Enter the answers in whole dollars, not in millions. Round the final answers to nearest whole dollar.) a. Calculate the present value of total outflows. b. Calculate the present value of total inflows. c. Calculate the net present value. d. Should the old issue be refunded with new debt? The Harding Corporation has $51.2 million of bonds outstanding that were issued at a coupon rate of 12.75 percent seven years ago. Interest rates have fallen to 11.6 percent. Preston Alter, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Preston would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Harding Corporation has a tax rate of 25 percent. The underwriting cost on the old issue was 3.7 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The premium for calling the bond early is 7.5 percent. a. Compute the discount rate. b. Calculate the present value of total outflows. c. Calculate the present value of total inflows. d. Calculate the net present value. e. Should the Harding Corporation refund the old issue? The Wagner Corporation has a $23 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 15 percent, the interest rates on similar issues have declined to 12.1 percent. The bonds were originally issued for 20 years and have 16 years remaining. The new issue would be for 16 years. There is a 8 percent call premium on the old issue. The underwriting cost on the new $23 million issue is $580,000, and the underwriting cost on the old issue was $430,000. The company is in a 34 percent tax bracket, and it will allow an overlap period of one month (1/12 of the year). Treasury bills currently yield 5 percent. (Do not round intermediate calculations. Enter the answers in whole dollars, not in millions. Round the final answers to nearest whole dollar.) a. Calculate the present value of total outflows. b. Calculate the present value of total inflows. c. Calculate the net present value. d. Should the old issue be refunded with new debt? The Harding Corporation has $51.2 million of bonds outstanding that were issued at a coupon rate of 12.75 percent seven years ago. Interest rates have fallen to 11.6 percent. Preston Alter, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Preston would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Harding Corporation has a tax rate of 25 percent. The underwriting cost on the old issue was 3.7 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The premium for calling the bond early is 7.5 percent. a. Compute the discount rate. b. Calculate the present value of total outflows. c. Calculate the present value of total inflows. d. Calculate the net present value. e. Should the Harding Corporation refund the old issue?

Answer rating: 100% (QA)

To determine whether the old bond issue should be refunded with new debt we need to compare the pres... View the full answer