Rilton Ltd. is considering calling 30 years, ₹ 1,000 bond issued 5 years ago with a coupon interest rate of 14 per cent. The bonds have a call price of ₹ 1,150 and had initially collected proceeds of ₹ 2.91 crores since a discount of ₹ 30 per bond was offered. The initial floating cost was ₹ 3,90,000. The Company intends to sell ₹ 3 crores of 12 per cent coupon rate, 25 years bonds to raise funds for retiring the old bonds. It proposes to sell the new bonds at their par value of ₹ 1,000. The estimated floatation cost is ₹ 4,25,000. The company is paying 40% tax and its after tax cost of debt is 8 per cent. As the new bonds must first be sold and then their proceeds to be used to retire the old bonds, the company expects a two months period of overlapping interest during which interest must be paid on both the old and the new bonds.

 You are required to evaluate the bond retiring decision.

Answer rating: 100% (QA)

To evaluate the bond retiring decision we need to calculate the net cost of retiring the old bonds a... View the full answer