Question

In: Accounting

As the new vice-president of finance, you are considering refinancing existing bonds with a new issue....

As the new vice-president of finance, you are
considering refinancing existing bonds with a new issue.
You note in particular a bond issue that has the following details:

Maturity value of bond issue $ 67,000,000
Time to maturity (in years) 10
Time since initial bond issue (in years) 8
Annual coupon rate on existing bond 12.0%
Call Premium
No call allowed during the first 5 years
Starting call premium in year 6 11%
Call premium declines by 0.5% per year staring in year 7
Current long-term interest rates on similar bonds 8.500%
Current short-term interest rates 6.0%
Overlap period (in months) 1
Corporate tax rate 34%
Underwriting and other issue costs $ 900,000

Should the old issue be refunded and replaced with a debt issue with a comparable
maturity and a coupon rate equal to that currently in effect on similar bonds? Show
your calculations.

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Expert Solution

ekkarill92 answered 2 years ago
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