Calculate the net present value of the bond refunding

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Reference no: EM131215648

Nientindoe Corporation (NC) issued $100 million of 7.375% coupon bonds 10 years ago, with a 30 year maturity. Each bond has a par value of $1,000, and they are callable at 104% of par value. Flotation costs were 0.5%, and the bonds were initially sold at par. However, interest rates are currently 6.175% for 20 – year bonds, and NC is considering issuing new 20year bonds and retiring old bond issue. Because the cash generated by the new bonds would be necessary to pay off the old bonds, there would be a 1.5 month period during which both the old and the new issue would be outstanding. Nientindoe Corporation is in a 35% tax bracket. Flotation costs on the new issue would be 0.25%, and the new bonds would be sold at par. Need to have step by step solution so I can understand how it was resolved. 1. Determine the initial investment if NC issues new bonds to retire the old bonds. Assume that NC will have to issue enough bonds to cover both the principal and the call premium associated with retiring the old issue. 2. Determine the annual cash flow savings if NC refunds the old bond issue. 3. Calculate the net present value of the bond refunding. Should NC refund the old issue?

Reference no: EM131215648

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