In: Finance
The Robinson Corporation has $43 million of bonds outstanding
that were issued at a coupon rate of 12.550 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 of 30 percent. The underwriting cost on the old issue was
4.30 percent of the total bond value. The underwriting cost on the
new issue will be 2.60 percent of the total bond value. The
original bond indenture contained a five-year protection against a
call, with a call premium of 6 percent starting in the sixth year
and scheduled to decline by one-half percent each year thereafter.
(Consider the bond to be seven years old for purposes of computing
the premium.) Use Appendix D for an approximate answer but
calculate your final answer using the formula and financial
calculator methods. Assume the discount rate is equal to the
aftertax cost of new debt rounded up to the nearest whole percent
(e.g. 4.06 percent should be rounded up to 5 percent)
a. Compute the discount rate. (Do not round intermediate
calculations. Input your answer as a percent rounded up to the
nearest whole percent.)
b. Calculate the present value of total
outflows. (Do not round intermediate calculations and round
your answer to 2 decimal places.)
c. Calculate the present value of total
inflows. (Do not round intermediate calculations and round
your answer to 2 decimal places.)
d. Calculate the net present value.
(Negative amount should be indicated by a minus sign. Do
not round intermediate calculations and round your answer to 2
decimal places.)