Question
ABC company is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it
ABC company is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue will be used to repurchase one of the existing bond issues. The information about the two currently outstanding bond issues is:
|
| Bond A | Bond B |
| Coupon rate | 5% | 6% |
| Value outstanding | $110,000,000 | $120,000,000 |
| Call premium | 5.5% | 6.5% |
| Transaction cost of refunding | $11,000,000 | $10,800,000 |
| Current YTM | 4.8% | 5.3% |
The corporate tax rate is 35%. What is the NPV of the refunding for each bond? Which, if either, bond should the company refinance? Assume the call premium is tax deductible.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started