Universal Heavy Equipment is looking into the possibility of refunding its 30-year $100 million outstanding bond issue, carrying a 14% coupon rate, which was sold 10 years ago. If the company goes ahead with the refunding, it can sell a new 20-year issue at a lower coupon rate of 10%, given current low interest rates in the economy. A call premium of 12% will have to be paid to retire the old bonds, while flotation costs on the new issue are expected to be $5 million. The company's marginal tax rate is 35%. The new bonds will have to be issued one month before the old bonds are called. Short-term government securities are currently providing a return of 6% annually. Universal's management is aware that the low interest rates may not last for very long, and may in fact go up if the economy continues to grow very rapidly and creates inflationary pressures.

1. Provide a complete bond refunding analysis and compute the NPV of the proposed refunding.

2. Create a spreadsheet model of your analysis and also provide detailed formula inserts.

3. Now assume that the bonds have a Canada call feature and are callable at the greater of Canada Yield Price (Canada Yield plus .SO%) and par. The yield to maturity on a 20-year Government of Canada bond is 9.5%. Rework the bond refunding analysis. How does the Canada Call feature affect the NPV of the proposed refunding? Create a new spreadsheet model for this analysis and provide detailed formula inserts.