Compute the present value of the refunding

Reference no: EM131034908

Problem:

The US Zither Corporation has \$50 million of 14 percent debentures outstanding, which are due in 25 years. USZ could refund these bonds in the current market with new 25-year bonds, sold to the public at par (\$1,000 per bond) with a 12 percent coupon rate. The spread to the underwriter is 1 percent, leaving \$990 per bond in proceeds to the company. The old bonds have an unamortized discount of \$1 million, unamortized legal fees and other expenses of \$100,000, and a call price of \$1,140 per bond. The tax rate is 40 percent. There is a one-month overlap during which both issues are outstanding, and issuing expenses are \$200,000.

Required:

Question: Compute the present value of the refunding, using the after-tax rate on the new bonds as the discount rate. Is the refunding worthwhile?

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