Calculate the incremental initial outlay required to issue

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Reference no: EM134025270

Problem

Shrestha and Sons Company is considering refunding Rs 20 million of outstanding bonds (20000 bonds at Rs 1000 par value) as a result of recent declines in long term interest rates. The plan would involve calling the Rs 20 million in outstanding bonds and issuing Rs 20 million of new bonds at the lower interest rate. The corporate tax rate is 40 percent. The details of both bond issues are outlined below:

Old bonds: Shrestha and Sons Company's old bonds were initially issued 10 year ago with 30 year maturity and a 13 percent coupon rate of interest. The bonds were initially sold at Rs 12 discount from their Rs 1000 par value, flotation costs were Rs 150000 and their call price is Rs 1130.

New bonds: the new issue is expected to sell at its Rs 1000 par value, have an 11 percent coupon interest rate, have a 20 year maturity and require Rs 400000 in flotation costs. The firm will have a 3 month period of overlapping interest while it retires the old bond.

A. Calculate the incremental initial outlay required to issue the new bonds.
B. Calculate the annual cash flow after tax savings. Get the instant assignment help.
C. If the company uses its 7 percent after tax cost of debt, would you recommend the refunding.

Reference no: EM134025270

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