Purchase Solution

Bond-refunding problem and capital budgeting

Not what you're looking for?

Ask Custom Question

Explain how the bond-refunding problem is similar to a capital budgeting decision?

If common stockholders are the owners of the company, why do they have the last claim on assets and residual claim on income?

As an investor which type of security would you prefer to own and why?

Purchase this Solution

Solution Summary

This explains the bond-refunding problem and its similarity to a capital budgeting decision

Solution Preview

Explain how the bond-refunding problem is similar to a capital budgeting decision?

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions.
The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments.
Corporate bonds are securities whose features are spelled out in their indenture agreement.
Bond refunding analysis is similar to capital budgeting analysis.

We can conceptualize bond refunding analysis as involving 4 steps:

1. Determine the Investment Outlay Required to Refund the Issue.

2. Calculate the Annual Flotation Cost Tax Effects

3. Calculate the Annual Interest Savings

4. Calculate the NPV of the refunding decision using the above information.

Suppose that interest rates might fall further, should we refund now or later. To address this question, one must compute the expected NPV of refunding. ...

Purchase this Solution


Free BrainMass Quizzes
Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Introduction to Finance

This quiz test introductory finance topics.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

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.