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The Robinson Corporation has $43 million of bonds outstanding that were issued at a coupon rate of 11 3/4 percent seven years ago. Interest rates have fallen to 10 3/4 percent. Mr. Brooks, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 2.4 percent of the total bond value. The underwriting cost on the new issue will be 1.7 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a call premium of 9 percent starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent.
a. Compute the discount rate
b. Calculate the present value of total outflows.
c. Calculate the present value of total inflows.
d. Calculate the net present value
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Caballos, Inc., has a debt to capital ratio of 14%, a beta of 1.92 and a pre-tax cost of debt of 7%. The firm had earnings before interest and taxes of $ 514 million for the last fiscal year, after depreciation charges of $ 253 million. Assume that t..
A corporate bond pays 11% percent interest. You are in the 30 percent tax bracket. What is your after-tax interest on this bond?
Suppose that you buy a semi-annual coupon bond with coupon rate of 10%; the market price of $1,120, and the time to maturity of 17 years. Seven years from now, the YTM on your bond is expected to decline by 2%, and you plan to sell. What is the holdi..
Would this pose any problems for the banker (at the bank where the salon borrows money) who reviews the salon's quarterly financial statements?
A trader creates a bear spread by selling a 6-month put option with a $25 strike price for $2.15 and buying a 6-month put option with a $29 strike price for $4.75. What is the initial investment? What is the total payoff (excluding the initial invest..
Suppose an Exxon Corporation bond will pay $9,138 41 years from now. If the going interest rate on similar 41-year bonds is 2.26%, how much is the bond worth today? State your answer in whole dollars.
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