Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Providence Industries has an outstanding debenture of $25 million that was issued when flotation costs could be expensed immediately. It carries a coupon rate of

image text in transcribed

Providence Industries has an outstanding debenture of $25 million that was issued when flotation costs could be expensed immediately. It carries a coupon rate of 10 percent and has 15 years to maturity. Currently, similar risk bonds are yielding 9 percent over a 15-year period, and Providence is wondering if a refunding would be economically sound. The existing debenture has a call premium of 5 percent at present. It is estimated that a new issue would require underwriting costs of $470,000 and other costs of $80,000. No overlap period would be required. Providence Industries has a tax rate of 25 percent. Its cost of capital is 16 percent. a-1. Compute the discount rate. (Round the final answer to 2 decimal places.) Discount rate % a-2. Calculate the present value of total outflows. (Round "PV Factor" to 4 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.) Total outflows $ a-3. Calculate the present value of total inflows. (Round "PV Factor" to 4 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.) Total inflows $ a-4. Calculate the net present value. (Round "PV Factor" to 4 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.) Net present value $ a-5. Should Providence Industries refund the old issue

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

Step: 3

blur-text-image

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

QlikView For Finance

Authors: B. Diane Blackwood

1st Edition

1784395749, 978-1784395742

More Books

Students also viewed these Finance questions