Pesa Holdings Ltd. issued a Kshs. 10, 000,000, 16% 10 year bond, 5 years ago at...

Transcribed Image Text:

Pesa Holdings Ltd. issued a Kshs. 10, 000,000, 16% 10 year bond, 5 years ago at a 2% discount. Issuing costs amounted to Kshs 200,000 However, the treasury bills rate has fallen leading to a fall in the interest rates in the market and the financial analyst has proposed that a new Kshs 10,000,000, 12%, 5 year bond be issued at a 3% discount. It is estimated that issuing costs will amount to 5% of the par value. The old bond can be redeemed at a 10% premium. There will be an interest overlap for two months. Tax rate is 40%. Required: (i) (ii) (iii) Annual cash investment required for refunding the bond.(6 marks) Annual cash benefit for refunding the bond (5 marks) Is it economical to refund the bond? (2 marks) Pesa Holdings Ltd. issued a Kshs. 10, 000,000, 16% 10 year bond, 5 years ago at a 2% discount. Issuing costs amounted to Kshs 200,000 However, the treasury bills rate has fallen leading to a fall in the interest rates in the market and the financial analyst has proposed that a new Kshs 10,000,000, 12%, 5 year bond be issued at a 3% discount. It is estimated that issuing costs will amount to 5% of the par value. The old bond can be redeemed at a 10% premium. There will be an interest overlap for two months. Tax rate is 40%. Required: (i) (ii) (iii) Annual cash investment required for refunding the bond.(6 marks) Annual cash benefit for refunding the bond (5 marks) Is it economical to refund the bond? (2 marks)

Answer rating: 100% (QA)

The detailed answer for the above question is provided below i Annual Cash Investm... View the full answer