One year ago Snare Inc., issued $100 million of 11-year bonds with a 9.5% coupon payable annually. The first coupon payment has just been paid. The bonds are callable at 105 beginning today. Floatation costs on that issue were $1 million. Snare Inc., has a 38% marginal tax rate. Since interest rates have fallen, Snare Inc., is considering calling in the bonds and refinancing at current rates. It has two, ten-year, financing alternatives.

a. 100 million public issue of 8% annual coupon bonds. Floatation costs would be one million.

b. 100 million private placement with 8% semi-annual coupons with a placement fee of 500000.

Call premiums and interest payments are tax deductible but the frontend fee and floatation cost must be capitalized and amortized over the life of the bond.

1. What will be the effective cost of raising funds from the public bond issue using IRR ?

2. Effective cost of raising funds from private placement of debt.?

3. What's the effective after-tax cost of refinancing that would make Snare Inc different calling the bonds and leaving them as it is?

Answer rating: 100% (QA)

Please refer to the attached files for detailed calculations of each part Some notes for the fo... View the full answer