The Board Looks to You

The financial department of Delphi Consolidated Industries $($DCI$)$ is just starting a $2-$week retreat in the Canadian wilderness. The president of DCI has been approached by an investment banker who has acquired $$1,000,000$ in DCI bonds in one of his deals. He is offering to sell the bonds back to DCI for $$900,000.$ The president thinks this seems like a good deal for DCI, but his background is in marketing, and he knows his limitations$.$ DCI has had dealing with this investment banker before$-$ his firm often underwrites DCI's bond issues. The president remembers that you seem to know your way around capital investments and has asked you to recommend a course of action by September ${13}^{th}($later this week$).$ The offer to sell at this price is good through this date.

The bonds consist of $100$ bonds, each of which is identical. Each bond was issued $4\mathrm{.}5$ years ago and had a term of $10$ years. The face value of each bond is $$10,000,$ and it pays $14\%$ in quarterly installments. The next payment will be made to the owner of record on September ${20}^{th}($this is the ${18}^{th}$ payment$).$

When the $100$ bonds were sold $4\mathrm{.}5$ years ago, they brought in less $$30,000$ in selling expenses$).$

The president and the board of directors have been talking about ways to use the unexpected profits from the sale of some land to the state for a right of way. One idea that was under consideration at the last meeting was to "call" $($or pay off early$)$ up to $$1,500,000$ of an older DCI bond issue.

The older bonds have a face value of $$100,000$ each and pay $18\%$ in semi$-$annual installments. They have an early call provision for a $5\%$ premium over face value. The bonds were sold $8$ years ago and had a $12-$year term. A payment $($Number $16)$ was made last week. These bonds were sold at a premium less $$2,500$ in selling expenses$)$ in part because of the early call premium.

The pre$-$tax MARR of DCI is $17\mathrm{.}5\%.$

What do you tell the president to do$?$ Case $7$

$rsto$ You

The financial department of Delphi Consolidated Industries $($DCI$)$ is just starting a $2-$week retreat in the Canadian wilderness. The president of DCI has been approached by an investment banker who has acquired $$1,000,000$ in DCI bonds in one of his deals. He is offering to sell the bonds back to DCI for $$900,000.$ The president thinks this seems like a good deal for DCI, but his background is in marketing, and he knows his limitations$.$ DCI has had dealing with this investment banker before$-$his firm often underwrites DCI's bond issues. The president remembers that you seem to know your way around capital investments and has asked you to recommend a course of action by September ${13}^{th}($later this week$).$ The offer to sell at this price is good through this date.

The bonds consist of $100$ bonds, each of which is identical. Each bond was issued $4\mathrm{.}5$ years ago and had a term of $10$ years. The face value of each bond is $$10,000,$ and it pays $14\%$ in quarterly installments. The next payment will be made to the owner of record on September ${20}^{th}($this is the ${18}^{th}$ payment$).$

When the $100$ bonds were sold $4\mathrm{.}5$ years ago, they brought in $$920,000($ $$950,000$ less $$30,000$ in selling expenses$).$

The president and the board of directors have been talking about ways to use the unexpected profits from the sale of some land to the state for a right of way. One idea that was under consideration at the last meeting was to "call" $($or pay off early$)$ up to $$1,500,000$ of an older DCI bond issue.

The older bonds have a face value of $$100,000$ each and pay $18\%$ in semi$-$annual installments. They have an early call provision for a $5\%$ premium over face value. The bonds were sold $8$ years ago and had a $12-$year term. A payment $($Number $16)$ was made last week. These bonds were sold at a premium less $$2,500$ in selling expenses$)$ in part because of the early call premium.

The pre$-$tax MARR of DCI is $17\mathrm{.}5\%.$

What do you tell the president to do$?$

Hint$*$ solve using presnet worth anaylsis of both options and find which one is better.