Worldwide Widget Manufacturing, Inc., decided to go ahead with its plan to expand. It issued $30 million in debt due in 30 years to finance the expansion at an 8 percent coupon rate.

Worldwide Widget Manufacturing, Inc., decided to go ahead with its plan to expand. It issued $30 million in debt due in 30 years to finance the expansion at an 8 percent coupon rate. The company makes interest-only, semiannual payments of $1,200,000 on this debt. Debt issued today would cost only 7 percent interest. You have been asked to determine whether the company should issue new debt (for 25 years) to pay off the old debt. If the company does so, it will have to pay $1.7 million as a “call premium” to the existing debt holders, and also $1.4 million to its investment bankers to float the issue. If the new debt was issued, what would be the semiannual interest payment savings or cost? What is the cost to refinance the debt? What would be the present value of the semiannual savings in interest payments over the life of the debt? Should you advise the company to replace the old debt with new debt? Why?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Husker’s Tuxedo’s, Inc. needs to raise $262 million to finance its plan for nationwide expansion. In...

Husker’s Tuxedo’s, Inc. needs to raise $262 million to finance its plan for nationwide expansion. In discussions with its investment bank, Husker’s learns that the bankers recommend an offer price (or gross price) of $40 per share and they will charge an underwriter’s spread of $2.35 per share. Calculate the net proceeds per share to Husker’s from the sale of stock. How many shares of stock will Husker’s need to sell in order to receive the $262 million needed?

Knowles Music Inc. wants to expand its business and wants to use some debt capital to help finance that expansion

1 Knowles Music Inc. wants to expand its business and wants to use some debt capital to help finance that expansion. If it borrows $150,000.00 for 5 years, and the lender says the quarterly payments will be $8,855.74, what is the interest rate for this loan? (Compute to 4 decimal places). Answer:N = 5 x 4 = 20 PV = 150,000PMT = -8,855.74 Compute I = 1.637499 x 4 = 6.549996%. (how to get these number) 2.Howertons Corp. is...

A $1,000 par value bond was issued 30 years ago at a 12 percent coupon rate....

A $1,000 par value bond was issued 30 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 8 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,090. Further assume Ms. Bright paid 40 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to...

XYZ Inc. has issued a 30-year bond with a coupon rate of 8%, the future value...

XYZ Inc. has issued a 30-year bond with a coupon rate of 8%, the future value of $1000, and a market rate of 9%. What is the current market price for the bond?

Jiminy's Cricket Farm issued a 30-year, 7 percent coupon bond 8 years ago. The bond makes...

Jiminy's Cricket Farm issued a 30-year, 7 percent coupon bond 8 years ago. The bond makes semi-annual coupon payments and sells for 92 percent of its face value. The face value of the debt issue is $18 million and the yield to maturity is 7.761%. Note: YTM for coupon bonds is quoted as an APR with semi-annual compounding. In addition, the company has a second debt issue on the market, a zero coupon bond with 8 years left to maturity;...

A few years ago, Spider Web, Inc. issued bonds with a 12.17 percent annual coupon rate,...

A few years ago, Spider Web, Inc. issued bonds with a 12.17 percent annual coupon rate, paid semiannually. The bonds have a par value of $1,000, a current price of $943, and will mature in 14 years. What would the annual yield to maturity be on the bond if you purchased the bond today? Round the answer to two decimal places in percentage form.

The Robinson Corporation has $44 million of bonds outstanding that were issued at a coupon rate of 12.650 percent seven years ago.

The Robinson Corporation has $44 million of bonds outstanding that were issued at a coupon rate of 12.650 percent seven years ago. Interest rates have fallen to 11.750 percent. Mr. Brooks, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate...

Subjects