Can anyone help me with this case? Please respond to questions 1 & 2 that are highlighted in bold below...
1) I need an analysis showing where the interest rate on the new issue bond changes from 10.0% up to 10.4% (please use bond refunding model below and provide excel formulas).
2) Also explain in a few words or paragraph what would happen if the current rates went from 10.0% up to 10.4%.
Bond Refunding Model
CASE Warner Motor Oil Company Gina Thomas was concerned about the feel for he bond refunding process. She effect that high interest expenses were having proposed to call in an 50 percent on the bottom line reported profits of Warner $30,000,000 issue that was scheduled to Motor oil Co. Since joining the company mature in the year 2025. The bonds had been three years ago as vice president of finance, issued in 2005 and since it was now 2010, she noticed that operating profits appeared to the bonds had 5 years remaining to be improving each year, but that earnings maturity. It was Gina's intent to replace the after interest and taxes were declining because bonds with a new $30,000,000 issue tha of high interest charges would have the same maturity date 15 years Because interest rates had finally started into the future as that of the original 2005 declining after a steady increase, she thought it issue. Based on advice from the firm' was time to consider the possibility of investment banking firm, Walston and Sons refunding a bond issue. As she explained to her the bonds could be issued at a rate of 10 boss, Al Rosen, refunding meant calling in percent. Joe Walston, a senior partner in the a bond that had been issued at a high interest rate investment banking firm, further indicated and replacing it with a new bond that was that the underwriting cost on the new issue similar in most respects, but carried a lower would be 2.8 percent of the $30,000,000 interest rate. Bond refunding was only feasible amount involved in a period of declining interest rates. Al Rosen, Before she could do her analysis, Gina who had been the CEO of the company for the needed to accumulate information on the old last seven years understood the general concept 1.50 percent bond issue that she was but he still had some questions proposing to refund. The original bond He said to Gina, "If interest rates are going ndenture indicated that the bonds had an 8 down, bond prices are certain to be going up percent call premium, and that the bonds Won hat make it quite expensive to buy could be called anytime after five years. Gina outstanding issues so tha explained to Al Rosen that the bondholder we can replace hem with new issues?" Gina had a quick and were protected from having their bonds called direct answer. "No, and the reason is that the n for the first five years after issue, but that old issues have a call provision associated he bonds were fa game after that with them." A call provision allows the firm Furthermore, from the sixth through the n bonds at slightly over par (usually 8 13th year, the call premium went down by O cal to 10 percent above par) regardless of what percent per year. By the 14th year after the market price is ssue, there was call premium and no the corporation could merely call in the bonds The Proposed Refunding Decision at par. Since n this case five years had Gina thought if she could present passed, the call premium would be exactly specific example to Al he would have a better ight percen
