Question

SCENARIO: (this information will pertain to questions 18-21) The Rebellion issued $50,000,000 face value of 30-year bonds carrying a 12% (annual payment) coupon; these bonds were issued five (5) years ago. The Rebellion would now like to refund these bonds that were issued five years ago. These bonds have been amortizing $1.5 million of flotation costs over their 30-year life. The Rebellion could sell a new issue of 25-year bonds at an annual interest rate of 10.00% in today's market. A call premium of 12 % would be required to retire the old bonds, and flotation costs on the new issue would amount to $1.5 million. The Rebellion's marginal tax rate is 30%. The new bonds would be issued when the old bonds are called. What is The Rebellion's necessary after-tax refunding investment expenditure, (i.e., the cash amount at the time of the refunding)? O $5,345,250 O $5,815,725 O $6,385,500 O $6,825,000 $7,200,000

Answer 1

Answe tnvestment Ly) op apter tar Caucculation of fnftias experdit nvestment ture Refunding particutars amount ReRund of oid Bonds 60000000 (450000000 12% ) Less Net proceede PYOM New Bond issue 48500000 (S000000 - 1500000) Tax she ld on call premium Less 3600000 Bo OF lo0o 00 000) bese unama To Shei ld On tized plotation cost 5000 00 K a5 37 S00 D 30 nitial investment 812500o

Saving ) Caecuoat on cf Annual Post Tax Old Bond Particlas NeioBond Coupon Amount Post tax a 7 So00 00 OD 0.7 $5 0000o 4200000 Soooo00D * 0.7 annua Tax shec id om use Ploation ost 5 oDo (1SO00 00 25)*036 30) to 30 5000 18000 Annual Post Tax san ngs 418000 3i22000 Annua savings post Taxtx) - 4 18So0b -3482000 4703000 NPV NPY $3125000 (4703000 1l-653) - 2 67059 bond Refundin Decision is Since Negati've N PV not niable