(b) The total principal value of Clatterbridge Ltd bonds is $165 million, and the bondshave an annual coupon rate of 6 percent. The total cost of refunding would be 8percent of the principal amount raised. The appropriate tax rate for the companyis 30 percent. Assume the bonds were issued at par value and that coupons arepaid annually.Required:How low does the market interest rate need to drop to justify refunding with a newbond issue?

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How low does the market interest rate need to drop to justify refunding with a new bond issue?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 17P

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Question

(b) The total principal value of Clatterbridge Ltd bonds is $165 million, and the bonds
have an annual coupon rate of 6 percent. The total cost of refunding would be 8
percent of the principal amount raised. The appropriate tax rate for the company
is 30 percent. Assume the bonds were issued at par value and that coupons are
paid annually.
Required:
How low does the market interest rate need to drop to justify refunding with a new
bond issue?

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