Question
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
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?
multiple choice
Yes
No
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