Commerce and Business
BusinessCorporate Finance/Financial ManagementContemporary Financial ManagementPractice Set 39
BusinessCorporate Finance/Financial ManagementContemporary Financial ManagementPractice Set 39Appendix: Bond Refunding Analysis
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- The Role and Objective of Financial ManagementThe Domestic and International Financial MarketplaceEvaluation of Financial PerformanceFinancial Planning and ForecastingThe Time Value of MoneyFixed Income Securities: Characteristics and ValuationCommon Stock: Characteristics, Valuation, and IssuanceAnalysis of Risk and ReturnCapital Budgeting and Cash Flow AnalysisCapital Budgeting: Decision Criteria and Real Option ConsiderationsCapital Budgeting and RiskThe Cost of CapitalCapital Structure ConceptsCapital Structure Management in PracticeDividend PolicyWorking Capital Policy and Short-term FinancingThe Management of Cash and Marketable SecuritiesManagement of Accounts Receivable and InventoriesLease and Intermediate-term FinancingFinancing With DerivativesRisk ManagementInternational Financial ManagementCorporate RestructuringAppendix: Continuous Compounding and DiscountingAppendix: Mutually Exclusive Investments Having Unequal LivesAppendix: Breakeven AnalysisAppendix: Bond Refunding AnalysisAppendix: Taxes
Question 1
Free
Multiple Choice
In a bond refunding analysis, the principal benefit, or cash inflow, is the present value of the
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pretax interest savings over the life of the issue
aftertax flotation cost savings
aftertax interest savings over the life of the issue
aftertax call premium
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Question 2
Free
Multiple Choice
In a bond refunding analysis, the net investment calculation includes
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aftertax call premium
flotation cost of new debt
overlapping interest
all of the above
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Question 3
Free
Multiple Choice
Bond refunding occurs when a company redeems a callable issue and
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sells an equity issue, thereby reducing outstanding debt
sells a new issue with a lower coupon rate
sells a preferred issue with a low dividend rate
none of the above is correct
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Question 4
Free
Multiple Choice
In bond refunding analysis the ____ is believed to be the most appropriate discount rate.
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after-tax cost of new debt
firm's marginal cost of capital
weighted average cost of capital
both b and c
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Question 5
Free
Multiple Choice
Bond ____ occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.
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redemption
retirement
recall
refunding
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Question 6
Multiple Choice
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.
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$11,620,259
$17,820,000
$ 9,117,935
$29,561,100
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Question 7
Multiple Choice
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?
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$337,500
$242,740
$404,567
$202,500
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Question 8
Multiple Choice
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: PVIFA?.???,?? = 12.050)
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yes, NPV is approximately $15.21 million
yes, NPV is approximately $9.86
yes, NPV is approximately 6.485 million
No, NPV is negative $0.554 million
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Question 9
Multiple Choice
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?
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Yes, NPV is approximately $9.838 million
Yes, NPV is approximately $9.930 million
Yes, NPV is approximately $9.655 million
Yes, NPV is approximately $10.808 million
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Question 10
Multiple Choice
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?
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Yes, NPV = $43,645,599
Yes, NPV = $43,798,975
Yes, NPV = $44,364,538
No, NPV is negative
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Question 11
Multiple Choice
In considering the bond refunding analysis, which of the following statements is/are correct?
I) The marginal rate of return is used as the discount rate
II) Bond refunding is most prevalent during a period of high inflation.
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I only
II only
Both I and II
Neither I nor II
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Question 12
Multiple Choice
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)?
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$1,517,465
$1,815,288
$1,357,642
$1,225,427
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Question 13
Multiple Choice
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?
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$515,100
$646,310
$725,600
$815,170
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Question 14
Multiple Choice
If interest rates decline, a firm should consider _______________ to take advantage of the lower interest rates.
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selling fixed assets
stock sales
bond refunding
investing in marketable securities
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Question 15
Multiple Choice
When considering bond refunding, all of the following are important input items EXCEPT:
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interest payments of old issue
weighted cost of capital
interest payments of new issue
after-tax cost of debt
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Question 16
Multiple Choice
When a bond is called, the old issue is retired and the bondholder receives:
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new, lower interest rate bonds
new corporate stock
a cash payoff
treasury stock
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Question 17
Essay
Why would a corporation consider bond refunding?
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Question 18
Essay
What is the principal inflow and what is the principal outflow from a bond refunding situation?
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Question 19
Essay
Why is the after-tax cost of debt used in bond refunding analysis?
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