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4/19/2010 Chapter 20. Ch 20-06 Build a Model Note: Fill in the shaded cells with the appropriate formula Current bond issue data Par value $70,000,000 Coupon rate 10% Original maturity 30 Remaining maturity 22 Original flotation costs $4,500,000 Call premium 10% Tax rate 40% Refunding data Coupon rate 8.0000% Maturity 22 Flotation costs $5,000,000 Time between issuing new bonds and calling old bonds (months) 1 Rate earned on proceeds of new bonds before calling old bonds (annual 5% a. Perform a complete bond refunding analysis. What is the bond refunding's NPV? Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue's 30-year life. Schumann's investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today's market. Neither they nor Schumann's management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase. A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann's marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period. A B C D E F G H I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34... View Full Document

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