DCH Ltd. has had several years of success and has greatly improved their financial position. As the
Question:
DCH Ltd. has had several years of success and has greatly improved their financial position. As the new Director of Finance, you are considering refinancing existing bonds with a new issue.
You note in particular a bond issue that has the following details:
Maturity value of bond issue $56,000,000
Time to maturity (in years) 9
Time since initial bond issue (in years) 8
Annual coupon rate on existing bond 10.5%
Call Premium
No call allowed during the first 5 years
Starting call premium in year 6 13%
Call premium declines by 0.5% per year staring in year 7
Current long-term interest rates on similar bonds 8.5%
Current short-term interest rates 6%
Overlap period (in months) 1
Corporate tax rate 34%
Underwriting and other issue costs $1,200,000
REQUIRED:
Should the old issue be refunded and replaced with a debt issue with a comparable maturity and a coupon rate equal to that currently in effect on similar bonds? Show your calculations.
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr