CH 12 Financial restructuring – bond refunding

CH 12 Financial restructuring – bond refunding - Click to...

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9/8/10 Click to edit Master subtitle style Financial restructuring – bond refunding When Interest Rates Decline….
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9/8/10 As interest rates have declined to all time lows… Many companies have called their higher priced debt in favor of issuing lower cost debt Like most things in finance, the decision is an application of Time Value of Money. The decision needs to answer two questions 1) Is refunding profitable (ie NPV>0)
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9/8/10 What are the cash flows of… Bond Refinancing Initial Investment (time 0) - Call premium - Flotation costs of new issue of bonds - Flotation costs of old issue (tax benefit) - Extra interest paid while both issues are outstanding (usually a month) - All after tax Annual Incremental Cash Flows (time 1 through n) - Interest differential - Amortization of flotation cost differential - All after tax Terminal Year Cash Flows (time n) - NO change if same maturity used
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9/8/10 What are the Cash Flows?
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CH 12 Financial restructuring – bond refunding - Click to...

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