Exam 20: A: Financing with Derivatives

If interest rates decline, a firm should consider to take advantage of the lower interest rates.

If Alliant can issue a $110 million 20-year refunding bond at 7.45% and call an older $110 million issue with 20-years to maturity that had a coupon of 8.80%, what is the present value of the interest savings? Assume a 40% tax rate.

Bond occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.

Demetres is refunding an outstanding $75 million, 9.35% debenture with a $75 million 7.80% debenture.Both issues will be outstanding for a 3-week period.If Demetres' marginal tax rate is 40%, what is the overlapping interest?

Midget Digit Toe Doctors is planning to refund a 30 year bond issue.They will replace $1,500,000 of 10.25% bonds with 6.25% bonds.The firm is in the 40% tax bracket.What is the savings on the refunding?

When considering bond refunding, all of the following are important input items EXCEPT:

Why is the after-tax cost of debt used in bond refunding analysis?

In considering the bond refunding analysis, which of the following statements is/are correct?

Cutech issued a $150 million of a 20-year, 10.5% debt 5 years ago.Since then, Cutech's financial conditions have improved and management believes that they could refund the old issue with a new 15-year, 7.5% issue.The old debt is now callable at 104 percent of par and issuance costs on the new issue would be 0.6 percent.The unamortized issuance costs on the old issue are $675,000.If Cutech calls the old issue and refunds it, both issues would be outstanding for a two-week period.If the company's marginal tax rate is 40%, should Cutech refund the old issue?

Bond refunding occurs when a company redeems a callable issue and

When a bond is called, the old issue is retired and the bondholder receives:

Why would a corporation consider bond refunding?

What is the principal inflow and what is the principal outflow from a bond refunding situation?

Wood River Power Company is considering refunding a $100 million 12% coupon debenture issue with a 9% coupon, 20-year debenture.The 12% issue also matures in 20 years and is now callable at 109% of par.The unamortized flotation cost on the old issue is $360,000 and the flotation cost of the new issue is 0.775%.Wood River estimated that there would be a 4 week period where both bonds would be outstanding.The company has a weighted cost of capital of 11% and a 40% marginal tax rate.Should Wood River sell the refunding issue? (Note: PVIFA0.054,20 = 12.050)

Clinch River Power is considering refunding a $150 million 12% coupon bond with a 10% coupon bond, 20 year bond.The current bond also matures in 20 years and is now callable at 110% of par.The unamortized flotation cost on the old issue is $540,000 and the flotation cost of the new issue is 0.925%.Clinch River estimates that there would be a 4 week period where both bonds would be outstanding.The company has a weighted cost of capital of 11% and a 40% marginal tax rate.Should Clinch River sell the refunding issue?

In a bond refunding analysis, the net investment calculation includes

In bond refunding analysis the is believed to be the most appropriate discount rate.

In a bond refunding analysis, the principal benefit, or cash inflow, is the present value of the

Waste Deep Disposal Services are considering refunding a $525,000,000 bond issue.The old bonds have a 7.25% coupon rate.The new bonds will have a 6% coupon rate.Both issues will be outstanding for about four weeks.What is the overlapping interest if the company is in the 38% tax bracket (rounded)?