Reference no: EM132955701

a. Uder Inc. is considering the possibility of refunding its $320 million outstanding bond. This bond has coupon rate of 15% (assume all coupons are paid annually in this question) and will mature in 10 years. To call the old bond, Uder has to pay the par value plus 2 coupons and will issue two new bonds at par: $160 million 8% coupon bond (the lower coupon rate is due to government guarantee) and $160 million 12% coupon bond. The total flotation costs on the new issues are expected to be $3 million. The two new bonds will have to be issued one month before the old bonds are called. The proceeds from the new bonds can be parked in the money market to earn 0.55% per month. The company's tax rate is 25%. Calculate the NPV of the proposed refunding

b. User Inc. can either purchase a machine for $65,000 or lease it from GoldLease for $10,500 per year (paid at the beginning of each year) for 7 years. The machine will have a salvage value of $6,000 at the end of year 7. The CCA rate is 30% and the machine is the only asset in the asset class for User. Assume User's cost of borrowing is 8% and its tax rate is 25%.

a) What is the NPV of leasing the machine?

b) Assume that GoldLease has many other assets in the asset class with UCC of $13,753.46 at year 7, tax rate of 35% and cost of borrowing of 6%, find the minimum lease payment required by GoldLease.