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Well-Sprung Corporation is considering offering a new $100 million bond issue to replace an outstanding $100 million bond issue. The firm wishes to take advantage of the decline in interest rates that has occurred since the original issue. The two bond issues are described in what follows. The firm is in the 30 percent tax bracket. Old bonds. The outstanding bonds have a $1,000 par value and an 8.5 percent coupon interest rate. They were issued five years ago with a twenty-year maturity. They were initially sold at a $30 per bond discount, and a $750,000 floatation cost was incurred. They are callable at $1,085. New bonds. The new bonds would have a fifteen-year maturity, a par value of $1,000, and a 7.0 percent coupon interest rate. It is expected that these bonds can be sold at par for a floatation cost of $600,000. The firm expects a three-month period of overlapping interest while it retires the old bonds.
a. Calculate the initial investment that is required to call the old bonds and issue the new bonds.
b. Calculate the annual cash flow savings, if any, expected from the proposed bond-refunding decision.
c. If the firm uses its after-tax cost of debt of 4.9 percent to evaluate low-risk decisions, find the net present value (NPV) of the bond-refunding decision. Would you recommend the proposed refunding? Explain your answer.
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Explain How will you utilize the WSJ in your personal life or career after this course
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Abby buys a position in a closed-end mutual fund that is selling at an 8% discount. The fund earns 12%, but the discount decreases to 5%. What is Abby's return on this investment?A. 8.5%B. 12.0 %C. 12.4D. 14.2%E. 15.7%
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A $2,500 6.5% eight year bond had annual coupons. If it is purchased for $2,590, the investor will anticipate 5.4% annual yield for the eight year investment. Find the redemption amount on this bond.
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,..
A firm has a cost of debt of 7.5 percent and a cost of equity of 16.2 percent. The debt-equity ratio is 0.45. There are no taxes. What is the firm's weighted average cost of capital?
Suppose the comments of Brian Walker, the president of Herman-Miller North America, who was quoted in chapter as having said: 'For dot.coms, it appears that market has implicitly capitalized a lot of those costs.
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