Sui Bian Ltd. has a callable outstanding bond issue with a face value of $5 million, which was issued ten years ago at flotation cost 5% of the face value. The bond has 10 years remaining to the maturity date and a coupon rate of 12% paid annually. The call premium of the old bonds is 50% of the annual coupon rate. Interest rates at the time of the issue were considerably higher than they are now and the company would now like to refinance the bonds. The new bonds of 10-year maturity could be issued at a coupon rate of 8% paid annually. The call premium of the new bonds is 60% of the annual coupon rate. The flotation costs associated with the new bond issue are 4% of the face value. The new bonds would be issued one month before the old bonds could be called. Firm's corporate tax rate is 35%. The current T-Bill rate is 3%. Note: Don't forget the minus sign for the negative cash flows! 1. What is the annual after-tax cost of debt? 2. What is the incremental after-tax interest savings from the refinancing? 3. What is the value of the call premium associated with the old issue of bonds?

Sui Bian Ltd. has a callable outstanding bond issue with a face value of $5 million, which was issued ten years ago at flotation cost 5% of the face value. The bond has 10 years remaining to the maturity date and a coupon rate of 12% paid annually. The call premium of the old bonds is 50% of the annual coupon rate. Interest rates at the time of the issue were considerably higher than they are now and the company would now like to refinance the bonds. The new bonds of 10-year maturity could be issued at a coupon rate of 8% paid annually. The call premium of the new bonds is 60% of the annual coupon rate. The flotation costs associated with the new bond issue are 4% of the face value. The new bonds would be issued one month before the old bonds could be called. Firm's corporate tax rate is 35%. The current T-Bill rate is 3%. Note: Don't forget the minus sign for the negative cash flows! 1. What is the annual after-tax cost of debt? 2. What is the incremental after-tax interest savings from the refinancing? 3. What is the value of the call premium associated with the old issue of bonds?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

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