The US Zither Corporation has $50 million of 14 percent debentures outstanding, which are due in 25

Question:

The US Zither Corporation has $50 million of 14 percent debentures outstanding, which are due in 25 years. USZ could refund these bonds in the current market with new 25-year bonds, sold to the public at par ($1,000 per bond) with a 12 percent coupon rate. The spread to the underwriter is 1 percent, leaving $990 per bond in proceeds to the company. The old bonds have an unamortized discount of $1 million, unamortized legal fees and other expenses of $100,000, and a call price of $1,140 per bond. The tax rate is 40 percent. There is a one-month overlap during which both issues are outstanding, and issuing expenses are $200,000. Compute the present value of the refunding, using the after-tax rate on the new bonds as the discount rate. Is the refunding worthwhile?

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...