Mason Manufacturing is contemplating offering a new $60 million bond issue to replace an outstanding $60...

Mason Manufacturing is contemplating offering a new $60 million bond issue to replace an outstanding $60 million bond issue. The firm wishes to do this to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described below. The firm is in the 30 per cent tax bracket.

Old bonds. The outstanding bonds have a $1,000 par value and a 7.5 per cent coupon interest rate.

They were issued three years ago with a 15-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $345,000 in floatation costs. They are callable at $1,070.

New bonds. The new bonds would have a $1,000 par value, a 6 per cent coupon interest rate, and a 12-year maturity. They could be sold at their par value. The floatation cost of the new bonds would be $360,000. The firm expects to have two months of overlapping interest.

Required:

a. Calculate the initial investment that is required to call the old bonds & issue the new bonds.

b. Calculate the annual cashflow savings, if any, expected form the proposed bond refunding decision.

c. Would you recommend the proposed refunding? Why? Show your calculations clearly to explain your answer.

please Don't give me the answer from somewhere else in Chegg, I've already checked them and I don't like the way they wrote it and I think they were not correct!

Solutions

Expert Solution

I have explained each and every step in detail, if you face any doubt please comment in box. Thank you !!

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Dillon Inc., an American company, is contemplating offering a new $100 million bond issue to replace...

Dillon Inc., an American company, is contemplating offering a new $100 million bond issue to replace an outstanding $100 million bond issue. The company wishes to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described in what follows. The company is in the 30% tax bracket. The company expects to pay overlapping interest for three months. Old bonds: The outstanding bonds have a $1,000 face value...

Oklahoma Service Company is contemplating offering a new $150 million bond issue to replace an outstanding...

Oklahoma Service Company is contemplating offering a new $150 million bond issue to replace an outstanding $150 million bond issue to take advantage of a recent decline in interest rates. The old and new bonds are described below. The firm is in the 35 percent tax bracket. Old bonds The outstanding bonds have a $1,000 par value and a 7.0 percent coupon interest rate. They were issued 5 years ago with a 15-year maturity. They were initially sold for their par...

Mason-Dixon Stores has two bond issues outstanding. The first issue has a coupon rate of 9...

Mason-Dixon Stores has two bond issues outstanding. The first issue has a coupon rate of 9 percent, matures in 4 years, has a total face value of $10 million, and is quoted at 109 percent of face value. The second issue has a 7 percent coupon, matures in 11 years, has a total face value of $22 million, and is quoted at 101 percent of face value. Both bonds pay interest semiannually. What is the weighted average after-tax cost of...

Canal Company is contemplating the purchase of a new leather sewing machine to replace the existing...

Canal Company is contemplating the purchase of a new leather sewing machine to replace the existing machine. The existing machine was purchased four years ago at an installed cost of $115,000; it was being depreciated under MACRS using a 5-year recovery period. The existing machine is expected to have a useful life of 5 more years. The new machine costs $203,000 and requires $8,000 in installation costs; it has a five-year useable life and would be depreciated under MACRS using...

Acer is contemplating to replace its old machinery with a new one. The cost of old...

Acer is contemplating to replace its old machinery with a new one. The cost of old machinery is 960,000. The old machinery was bought 6 years ago with a total useful life of 13 years. If sold now, the old machinery can be salvaged at $17,000. The existing machinery has the production capacity of 30,000 units. Acer Inc.'s finished product is called Product X which can be sold at $75, and has per unit variable cost of $42. The annual...

Madison Square Stores has a $20 million bond issue outstanding that currently has a market value...

Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $19.4 million. The bonds mature in 6.5 years and pay semiannual interest payments of $35 each. What is the firm's pretax cost of debt? 7.74 percent 7.80 percent 7.59 percent 7.08 percent 8.21 percent

2. Lolonyo Company is contemplating the purchase of a new high-speed widget grinder to replace the...

2. Lolonyo Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The new grinder costs GHs 105,000 and requires GHs 5,000 in installation costs; it has a 5-year usable life and would be depreciated under MACRS using a 5-year recovery period. The cost of the existing machine was 70,000 and it was being depreciated under the 5-year recovery period. The existing machine has been in use for the past 3 years and Lolonyo...

A firm is contemplating a new, mechanized welding system to replace its current manual system. It...

A firm is contemplating a new, mechanized welding system to replace its current manual system. It costs $600,000 to get the new system. The cost will be depreciated at a 30 percent CCA rate. Its expected life is four years. The system would actually be worth $100,000 at the end of fours years. The management thinks the new system could save $180,000 per year pre-tax in labour costs. The tax rate is 44 percent and the required return is 15...

An MNC makes a 60- day USD 50 million ECP issue. If the issue was priced...

An MNC makes a 60- day USD 50 million ECP issue. If the issue was priced at a discount of 4.2 percent (annualized, simple interest actual/ 360 convention) and fees totaled USD 200,000, what is the cost of financing? Format x.xx%

(Bond relationship) Mason, Inc. has two bond issues outstanding, called Series A and B, both paying...

(Bond relationship) Mason, Inc. has two bond issues outstanding, called Series A and B, both paying the same annual interest of $105. Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year. a. What would be the value of each of these bonds when the going interest rate is (1) 7 percent, (2) 11 percent, and (3) 13 percent? Assume that there is only one more interest payment to be made on the...

Subjects