Purchase Solution

Refund the old issue of bonds outstanding

Not what you're looking for?

Ask Custom Question

The Robinson Corporation has $50 million of bonds outstanding that were issued at a coupon rate of 11 3/4 percent seven years ago. Interest rates have fallen to 10 3/4 percent. Mr. Brooks, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 18 years of to maturity. The Robinson Corporation has a tax rate of 35 percent. The underwriting cost on the old issue was 2.5 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 9.5 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the after tax cost of new debt rounded up to the nearest whole number. Should the Robinson Corporation refund the old issue?

Purchase this Solution
Solution Summary

This solution explains whether or not the Robinson Corporation should refund an old issue given information such as coupon rates, interest rates, underwriting cost and original bond indenture.

Purchase this Solution
Free BrainMass Quizzes
Lean your Process

This quiz will help you understand the basic concepts of Lean.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

View More Free Quizzes
Related BrainMass Solutions

  • Calculating the refunding of bonds

    118748 Calculating the refunding of bonds The Bowman Corporation has $20 million bond obligation outstanding, which is considering refunding.

  • Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole number. Should the Sunbelt Corporation refund the old issue?

    Heath. the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Mr. Heath would like to refund the bonds with a new issue of equal amount also having 18 years to maturity.

  • refunding and municipal bonds/tax exempt bonds

    A call of a bond issue is the early retirement of part of an outstanding bond issue. A refunding is the issuance of new bonds (the "refunding bonds") to retire the entirety of a prior issue (the "refunded bonds").

  • Bond refunding

    288780 Bond Prices An outstanding issue of Public Express Airlines debentures has a call provision attached. The total principal value of the bonds is $250 million, and the bonds have an annual coupon rate of 8 percent.

  • Bond refunding

    A firm is considering the refunding of an outstanding 30-year bond issue. The original issue consists of $20 million in 12% callable bonds with $300,000 in flotation costs and a call premium of 10%.

  • Bond Refunding Analysis for Mullet Technologies

    issue after tax = $450,000.00 Interest paid on the old bond issue between when the new bonds are issued and the old bonds are retired Interest earned on investment in T-bonds after tax = $225,000.00 Interest earned on the proceeds from the

  • Long-Term Debt and Leasing Cases: Nintendo and Barclay Polymers

    month period during which both the old and the new issue would be outstanding.

  • Multiple choice

    The new bond issue and the refunding of old bonds are different decisions. So new bonds can be issued when the rates are low and then the proceeds can be used to refund the earlier bonds. a.

  • Bond refunding

    A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Mullet's marginal federal plus-state tax rate is 40%.

View More Related Solutions