The Springfield Gas and Electric Company is considering refunding $50 million of 11 percent debt with an
Question:
The Springfield Gas and Electric Company is considering refunding $50 million of 11 percent debt with an 8 percent, 20-year debt issue. The existing, or old, issue also matures in 20 years and now is callable at 108 percent of par. The unamortized issuance cost on the old issue is $400,000, and the issuance cost of the new issue is 0.875 percent. The company estimates that both issues will be outstanding for four weeks, resulting in overlapping interest. The company has a weighted cost of capital of 10 percent and a 40 percent marginal tax rate. In addition, the company’s financial management feels as though the present interest rate decline has nearly bottomed out. Calculate the net present value of the refunding and make a recommendation to management on whether to refund the bonds.
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow