Finance Question Please see the attached spreadsheet.

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Business Finance

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Start with the partial model in the file Ch20 P06 Build a Model.xls on the textbook’s Web site. Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue’s 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8% in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6 percent anytime soon, but there is a chance that interest rates will increase. a. Perform a complete bond refunding analysis. What is the bond refunding’s NPV? b. At what interest rate on the new debt is the NPV of the refunding no longer positive? t is amortizing Schumann’s A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 B C D E Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue's 30-year life. Schumann's investment indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today's market. Neither they no management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates w A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amoun Schumann's marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bo with the proceeds being invested in short-term government securities returning 5 percent annually during the interim perio Current bond issue data Par value Coupon rate Original maturity Remaining maturity Original flotation costs Call premium Tax rate $ $ Refunding data Coupon rate Maturity Flotation costs $ Time between issuing new bonds and calling old bonds (months) Rate earned on proceeds of new bonds before calling old bonds (annual) 70,000,000 10% 30 22 4,500,000 10% 40% 8.0000% 22 5,000,000 1 5% a. Perform a complete bond refunding analysis. What is the bond refunding's NPV? Initial investment outlay to refund old issue: Call premium on old issue = After-tax call premium = New flotation cost = Old flotation costs already expensed = Remaining flotation costs to expense = Tax savings from old flotation costs = Additional interest on old issue after tax = Interest earned on investment in T-bonds after tax = Total investment outlay = Annual Flotation Cost Tax Effects: Annual tax savings on new flotation = Tax savings lost on old flotation = Total amortization tax effects = Annual interest savings due to refunding: Annual after tax interest on old bond = You get to expense the remaining This is interest paid on the old bo This is interest earned on the pro 53 54 55 56 57 58 59 60 61 62 63 64 65 66 A B Annual after tax interest on new bond = Net after tax interest savings = C D Annual cash flows = After-tax cost of new debt = NPV of refunding decision = b. At what interest rate on the new debt is the NPV of the refunding no longer positive? Use Goal Seek to set cell D60 to zero by changing cell C27. "Break-even" interest rate = E F G H I J K L M N 1 2 3 4 5 6 oupon, 30-year bond issue that was sold 8 years 7 ar life. Schumann's investment bankers have 8 today's market. Neither they nor Schumann's 9 is a chance 10 that interest rates will increase. 11 12 on the new 13issue would amount to $5 million. sued 1 month 14 before the old bonds are called, annually during 15 the interim period. 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 ou get to expense 41 the remaining flotation costs his is interest 42 paid on the old bond issue between when the new bonds are issued and the old bonds are retired his is interest 43 earned on the proceeds from the new bonds before they are used to pay off the old bonds. 44 45 46 47 48 49 50 51 52
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