Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Not sure what I am doing wrong on steps 3 and 4 Question: The Robinson Corporation has $25 million of bonds outstanding that were issued

Not sure what I am doing wrong on steps 3 and 4

Question:

The Robinson Corporation has $25 million of bonds outstanding that were issued at a coupon rate of 10.750 percent seven years ago. Interest rates have fallen to 10.150 percent. Mr. Brooks, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 2.50 percent of the total bond value. The underwriting cost on the new issue will be 1.70 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a call premium of 8 percent starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent (e.g. 4.06 percent should be rounded up to 5 percent)

a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) 8%

b. Calculate the present value of total outflows. (Do not round intermediate calculations and round your answer to 2 decimal places.) 1,669,085

c. Calculate the present value of total inflows. (Do not round intermediate calculations and round your answer to 2 decimal places.) Part 3

.1075x25,000,000 =2,687,500

.1015x25,000,000= 2,537,500

150,000

150,000x(1-.3) = 105,000

105,000 (9.122) = 957,810

Part 4

.025(25,000,000= 625,000

25,000 per year (625,000/25) 7= 175,000

450,000

25,000 x 9.122 = 228,050

221,950x .3 = 66,585

957,810+66,585= 1,024,395 Which is wrong. I have no Idea what I am doing wrong and have been working this for far too long. Please help

d. Calculate the netpresent value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Microeconomics

Authors: Glenn Hubbard, Anthony O'Brien

7th Edition

0134737504, 978-0134737508

More Books

Students also viewed these Finance questions