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’sNPV?
b. At what interest rate on the new debt is the NPV of the refunding no longer positive?