Conduct a complete bond refunding analysis

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Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issues 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8% in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6% anytime soon, but there is a chance that interest rates will increase.

a. Conduct a complete bond refunding analysis. What is the bond rounding’s NPV?

b. At what interest rate on the new debt is the NPV of the refunding no longer positive?

Reference no: EM13805884

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