Blue Mountain Distributors has a $40 million bond outstanding that carries a 12 percent coupon rate...

  

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Blue Mountain Distributors has a $40 million bond outstanding that carries a 12 percent coupon rate paid annually. Current bonds yield are 9.5 percent. The $40 million bond was issued 20 years ago with 30 years to maturity and carries a call premium of 5%. With the fall in interest rates the company's Finance Manager has recommended that the bond be refunded. The new bond issue would require $1.2 million in underwriting cost and an overlap period of one month is anticipated. Short term money market rates are currently 7 percent and Blue Mountain has a tax rate of 40 percent. Required: Advise Blue Mountain Distributors on whether or not they should refund the bond. (Show all calculations) (15 marks) Blue Mountain Distributors has a $40 million bond outstanding that carries a 12 percent coupon rate paid annually. Current bonds yield are 9.5 percent. The $40 million bond was issued 20 years ago with 30 years to maturity and carries a call premium of 5%. With the fall in interest rates the company's Finance Manager has recommended that the bond be refunded. The new bond issue would require $1.2 million in underwriting cost and an overlap period of one month is anticipated. Short term money market rates are currently 7 percent and Blue Mountain has a tax rate of 40 percent. Required: Advise Blue Mountain Distributors on whether or not they should refund the bond. (Show all calculations) (15 marks)

Answer rating: 100% (QA)

Analysis 1 Call Cost The call premium on the 40 million bond is 5 so the call cost would be calculated as follows 5 40000000 2000000 2 Current Market ... View the full answer