Safariloam Ltd issued a Kshs.100 million par value, 10 year, 15 percent coupon bond five years...

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Safariloam Ltd issued a Kshs.100 million par value, 10 year, 15 percent coupon bond five years ago. The bond was issued at a 2 percent discount and issue costs amounted to Kshs 2 million. Due to decline in Treasury bill rates in the recent past, interest rates in the money market have been falling presenting favorable opportunities for refinancing. A financial analyst engaged by the company to assess the possibility of refinancing the debt reports that a new Kshs.100 million per value, 12 percent, 5 year bond can be issued by the company. Issue costs for the new bond will be 5 percent of the value and a 3 percent discount will have to be given to attract investors. The old bond can be redeemed at 10 % premium and in addition two months interest penalty will have to be paid on redemption. All the bond issue expenses (including the interest penalty are amortized on a straight line basis over the life of the bond and allowable for corporate tax purposes. The applicable corporation tax rate is 40 percent. Required: (a) Cash investment required for the refunding decision. (b) Annual cash benefits if any, from the refunding decision. (c) Explain, with appropriate calculation, whether it is worthwhile to replace the existing bond. (3 marks) (6 marks) (6 marks) Safariloam Ltd issued a Kshs.100 million par value, 10 year, 15 percent coupon bond five years ago. The bond was issued at a 2 percent discount and issue costs amounted to Kshs 2 million. Due to decline in Treasury bill rates in the recent past, interest rates in the money market have been falling presenting favorable opportunities for refinancing. A financial analyst engaged by the company to assess the possibility of refinancing the debt reports that a new Kshs.100 million per value, 12 percent, 5 year bond can be issued by the company. Issue costs for the new bond will be 5 percent of the value and a 3 percent discount will have to be given to attract investors. The old bond can be redeemed at 10 % premium and in addition two months interest penalty will have to be paid on redemption. All the bond issue expenses (including the interest penalty are amortized on a straight line basis over the life of the bond and allowable for corporate tax purposes. The applicable corporation tax rate is 40 percent. Required: (a) Cash investment required for the refunding decision. (b) Annual cash benefits if any, from the refunding decision. (c) Explain, with appropriate calculation, whether it is worthwhile to replace the existing bond. (3 marks) (6 marks) (6 marks)

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