Barton Simpson, the chief financial officer of Broadband, Inc., could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par and on the new issue, it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate will be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market. a. First compute the price of the old bonds in the open market. Use the valuation procedures for a bond that were discussed in Chapter 10 (using annual analysis). Determine the price of a single $1,000 par value bond. b. Compare the price in part a to the 8 percent call premium over par value. Which appears to be more attractive in terms of reacquiring the old bonds, calling them or buying them in the open market? c. Now do the standard bond refunding analysis as discussed in chapter 16. Is the refunding financially feasible? d. In terms of the refunding decision, how should Barton be influenced if he thinks interest rates might go down even more? a. First compute the price of the old bonds in the open market. Use the valuation procedures for a bond that were discussed in Chapter 10 (using annual analysis). Determine the price of a single $1,000 par value bond. Calculate the price for one $1000 bond b. Compare the price in part a to the 8 percent call premium over par value. Which appears to be more attractive in terms of reacquiring the old bonds, calling them or buying them in the open market? c. Now do the standard bond refunding analysis as discussed in chapter 16 . Is the refunding financially feasible? Outflow calculations: (1) After-tax call premium payment: (2) Net cost of underwriting expense on the new bond issue Inflow calculations: (1) Savings of lower interest payments: Annual interest payment on new bonds After-tax annual cost savings of new bonds PV of cost savings through maturity (2) Savings of underwriting costs on the old issue \begin{tabular}{|c|c|} \hline Original underwriting costs on the old issue & \\ \hline Amount amortized at the time of the call & \\ \hline Unamortized amount at the time of the call & \\ \hline Tax benefit of write-off on unamortized amt & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Annual amortization amount on the old issue & \\ \hline Tax benefit of annual amortization (old issue) & \\ \hline Presentvalueofremainingtaxbenefitsifoldissuewasleftinplace & \\ \hline \end{tabular} Incremental savings of immediate write-off of remaining underwriting costs (old issue) Compute NPV of the bond refund \& decide feasibility: NPV of inflows and outflows of bond refund Is the bond refund financially feasible (Y/N)? In terms of the refunding decision, how should Barton be influenced if he thinks interest ates might go down even more