As CFO for Sundown Corp, you have initiated discussions to refinance the business. NoMoneyHoney Corp. has presented an offer to replace the current long-term debt structure with a new long-term facility - both of which requires a full repayment at the end of the term. The current long-term debt balance is $50,000,000 at 11.35% per annum and has 15 years remaining. Early debt retirement fees amount to 7.25% of the outstanding balance and are capital in nature. The new facility is for up to $65,000,000 at 9.05% for 15 years and has a one-time 9.75% transaction cost (based on actual dollars borrowed) attached to it. Transaction fees are deductible for tax purposes for three years after incurred. Sundown Corp.'s corporate tax rate is 28%. You were also advised that it would take 40 days from the time of receiving the new facility funding to repay the old debt in full. Short term deposit rates earn 1.65% per annum.

REQUIRED: (show all calculations)

a) Prepare a cost benefit analysis to show whether or not the offer should be accepted by Sundown Corp. 

b) Sensitivity Analysis 

1. What is the decision if tax rates decrease by 3% to 23%? 

2. What is the decision if new interest rates were decreased by 0.5% to 8.65%? 

Answer rating: 100% (QA)

The offer should be accepted by Sund own Corp The cost of the new facility is 5 875 000 The benefits ... View the full answer