Kim Mitchell has lots of questions and wants to fully understand all of the risks and returns before making a decision. More specifically, she wants to know:

How sensitive is the refunding NPV to changes in interest rates and what does this imply for the risk of the refunding decision? Graph the relationship between refunding NPV and interest rate (use a range of 4 to 10 percent.)

What is the breakeven interest rate? How sensitive is the refunding NPV to changes in tax rates and what does this imply for the risk of the refunding decision? Graph the relationship between refunding NPV and tax rate (use a range of 10 to 70 percent.)

What is the optimal tax rate? Briefly explain the shape of the curve.

What happens if there is a downgrade in Senior Cares bond rating? Suppose the major bond rating agencies unexpectedly downgrade Senior Cares credit rating from A to triple-B before the firm could initiate the refunding, resulting in a 7.5 percent coupon rate and flotation costs of 1.5 percent on the new issue.

How would these changes affect the refunding decision?

What would happen if Senior Care was (and always had been) a not-for-profit provider? Assume that the relevant interest rates are 75 percent of the rates given to account for the fact that the debt would be tax exempt. Compare the NPV of the refunding assuming Senior Care was a not-for-profit to the original refunding NPV.

INPUT DATA: Original Bond Issue Size of issue Old bond coupon rate Old flotation cost Original maturity of old issue Years remaining on old bond Proposed Bond Issue New bond coupon rate New issue flotation cost Maturity of new issue Other Data ax rate MODEL GENERATED DATA: STANDARD ANALYSIS: Current Call Premium: Cost of Refunding at t 0: Call premium on old issue Flotation cost on new issue Tax savings on old float exp Net investment outlay After-tax Flotation Cost Effects: New issue flotation costs Tax benefit lost on old float Net PV of flotation cost effects nterest Savings Due to Refunding Annual payment (old bond) Annual payment (new bond) Net annual savings and PV NPV of the Refunding Decision: KEY OUTPUT: $100,000,000 NPV $3,817,019 8.0% $1,500,000 30 25 7.0% $1,000,000 25 40.0% 8.0% Amount Amount Present Before Tax After Tax Value ($8,000,000 ($4,800,000) ($4,800,000 (1,000,000 500,000 500,000 1,250,000 $5,300,000 $40,000 $244,752 $16,000 (20,000) (50,000) 305,940 $61,188 $4,800,000 $8,000,000 (7,000,000) 4,200,000 $600,000 $9,178,207 $3,817,019 END INPUT DATA: Original Bond Issue Size of issue Old bond coupon rate Old flotation cost Original maturity of old issue Years remaining on old bond Proposed Bond Issue New bond coupon rate New issue flotation cost Maturity of new issue Other Data ax rate MODEL GENERATED DATA: STANDARD ANALYSIS: Current Call Premium: Cost of Refunding at t 0: Call premium on old issue Flotation cost on new issue Tax savings on old float exp Net investment outlay After-tax Flotation Cost Effects: New issue flotation costs Tax benefit lost on old float Net PV of flotation cost effects nterest Savings Due to Refunding Annual payment (old bond) Annual payment (new bond) Net annual savings and PV NPV of the Refunding Decision: KEY OUTPUT: $100,000,000 NPV $3,817,019 8.0% $1,500,000 30 25 7.0% $1,000,000 25 40.0% 8.0% Amount Amount Present Before Tax After Tax Value ($8,000,000 ($4,800,000) ($4,800,000 (1,000,000 500,000 500,000 1,250,000 $5,300,000 $40,000 $244,752 $16,000 (20,000) (50,000) 305,940 $61,188 $4,800,000 $8,000,000 (7,000,000) 4,200,000 $600,000 $9,178,207 $3,817,019 END