Wood River Power Company Is Considering Refunding a $100 Million

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? Why or why not? (Note: PVIFA_0.054,20 = 12.050)

A) Yes; NPV is approximately $15.21 million
B) Yes; NPV is approximately $9.86
C) Yes; NPV is approximately 6.485 million
D) No; NPV is negative $0.554 million

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free