Big Boats Company wants to take advantage of the decline in interest rates that has occurred sinc...
- Big Boats Company wants to take advantage of the decline in interest rates that has occurred since it issued $50 million worth of bonds 5 years ago. The firm is in the 40% tax bracket. The old and new bonds are described below:
Outstanding bonds: The outstanding bonds have a $1,000 par value and a 9% coupon interest rate. They were issued 5 years ago with 20 years original maturity. They were initially sold at par and the firm incurred $350,000 in flotation costs. The bonds are callable at a 9% premium.
New bonds: The new bonds would have a $1,000 par value, a 7% coupon rate, and a 15-year maturity. They could be sold at par value but would incur flotation costs of $500,000. The firm does not expect any overlapping interest.
Find the NPV of the bond refunding decision. Do you recommend the proposed refunding?
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Big Boats Company wants to take advantage of the decline in interest rates that has occurred sinc...
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