The Modex Corporation is planning to replace its outstanding bond issue of ¢100 million by putting..
The Modex Corporation is planning to replace its outstanding bond issue of ¢100 million by putting up a new offering of ¢100 million bond issue into consideration. This new consideration is on the fact that there has been a decrease of interest rates since the last original issue and hence wants to take advantage. If the firm is within the thirty percent tax bracket, what follows is how the two bond issues are described. Features of old bonds: In respect of the outstanding bonds there is a ¢1,000 par value at 8.5% coupon rate. The bonds have a 20-year maturity and have been issued five years ago. The corporation sold these bond at an initially price of ¢30 per bond at discount, with a floatation cost of ¢750,000, with a callable price of ¢1,085. Features of new bonds: There would be a ¢1000 par value for the new bonds with a maturity of 15 years at a coupon rate of 7.0%. The new bonds again can to be sold at their par value with a ¢600,000 expected floatation cost. The expected overlapping interest is scheduled by the firm to be a period of 3months as it tries to retire the old bonds. a. Estimate the investment’s initial cost required to call the old bonds and issue the new bonds. b. With bond-refunding proposal, what would be the cash flow savings annual value if there should be, if any? c. If the firm’s 4.9 percent after-tax cost of debt is used to evaluate its low-risk investment decisions, calculate the bond-refunding decision net present value (NPV). As an expert in bond valuation would you advise the firm to go ahead with the proposed refunding? Explain your answer. Mar 29 2022 03:09 PM
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