An outstanding issue of Public Express Airlines debentures has a call provision attached The total principal value of the bonds is $250 million, and the bonds have an annual coupon rate of 9 percent The company is considering refunding the bond issue Refunding means that the company would issue new...

tr msoheightsourceauto col msowidthsourceauto br msodataplacementsamecell style18 msonumberformat 000 000 00220022 msostylenameComma 2 style19 msonumberformat00220022 00000220022 00000220022 00220022 ...

An outstanding issue of Public Express Airlines debentures has a call provision attached. The total principal value

Question:

An outstanding issue of Public Express Airlines has a call provision attached. The total principal value of the bonds is $250 million, and the bonds have an annual rate of 9 percent. The company is considering refunding the bond issue. Refunding means that the company would issue new bonds and use the proceeds from the new bond issuance to repurchase the outstanding bonds. The total cost of refunding would be 10 percent of the principal amount raised. The appropriate tax rate for the company is 35 percent. How low does the borrowing cost need to drop to justify refunding with a new bond issue?

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...