In: Finance
I am not good in finance since I am majoring in accounting. ABC company has issued $350,000,000 with annual coupon rate, required return 122.5%. Now, the company is trying to refinance and restructure the company. Which option is better? If none of them is good, what would you do if you were in charge? would you issue more or less bonds? Serious replies please! Do not waste our time and money.
Original | New Option 1 | New Option 2 | ||
Face Value (prinipal) | 350,000,000 | 350,000,000 | 350,000,000 | |
Annual Coupon Rate | 7.625% | 3.5% | 4.0% | |
Required Return | 122.5% | 122.5% | 122.5% | |
Years to Maturity | 10 | 10 | 10 | |
Payment Frequency | 1 | 1 | 1 | |
Value of Bond | $21,896,086 | $10,114,335 | $11,542,426 | |
Extinguishment | $11,781,751 | $10,353,660 |
Original | New Option 1 | New Option 2 | |||||||
Face Value (prinipal) | 350,000,000 | 350,000,000 | 350,000,000 | ||||||
Annual Coupon Rate | 7.63% | 3.50% | 4.00% | ||||||
Required Return | 122.50% | 122.50% | 122.50% | ||||||
Years to Maturity | 10 | 10 | 10 | ||||||
Payment Frequency | 1 | 1 | 1 | ||||||
Value of Bond | $21,896,086 | $10,114,335 | $11,542,426 | ||||||
Extinguishment | $11,781,751 | $10,353,660 | |||||||
Commentery | |||||||||
Since Required return (122.50%) is same in all 3 scenarios, the company will have same debt cost in all 3 scenarios. | |||||||||
Since the coupon rates are different, the price of bond is different which will impact the no of bonds issued but capital quantum will remain same. | |||||||||
In 1st scenario where coupon rate is higher, the company is able to sell its bond at premium. Bond price is high and hence no of bonds being issued | |||||||||
is less but still the amount raised is same at high coupon rate | |||||||||
in 2nd and 3rd scenario, the coupon payments are less and hence the company is not able to sell these bonds at as much premium as they could do so in 1st scenario. | |||||||||
To refinance the bonds, company will have to sell more bonds in option 1 as bond price is different. | |||||||||
To refinance the bonds, company will have to sell more bonds in option 2 also but comparitively less as compared to option 1 as the bond price is more in option 2 which is attributable to its higher coupon rate. |