Appendix: Bond Refunding Analysis

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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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A

pretax interest savings over the life of the issue

B

aftertax flotation cost savings

C

aftertax interest savings over the life of the issue

D

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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A

aftertax call premium

B

flotation cost of new debt

C

overlapping interest

D

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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A

sells an equity issue, thereby reducing outstanding debt

B

sells a new issue with a lower coupon rate

C

sells a preferred issue with a low dividend rate

D

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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A

after-tax cost of new debt

B

firm's marginal cost of capital

C

weighted average cost of capital

D

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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A

redemption

B

retirement

C

recall

D

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.

Choose correct answer/s
A
$11,620,259
B
$17,820,000
C
$ 9,117,935
D
$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?

Choose correct answer/s
A
$337,500
B
$242,740
C
$404,567
D
$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)

Choose correct answer/s
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
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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?

Choose correct answer/s
A
Yes, NPV is approximately $9.838 million
B
Yes, NPV is approximately $9.930 million
C
Yes, NPV is approximately $9.655 million
D
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?

Choose correct answer/s
A
Yes, NPV = $43,645,599
B
Yes, NPV = $43,798,975
C
Yes, NPV = $44,364,538
D
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.

Choose correct answer/s
A
I only
B
II only
C
Both I and II
D
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)?

Choose correct answer/s
A
$1,517,465
B
$1,815,288
C
$1,357,642
D
$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?

Choose correct answer/s
A
$515,100
B
$646,310
C
$725,600
D
$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.

Choose correct answer/s
A
selling fixed assets
B
stock sales
C
bond refunding
D
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:

Choose correct answer/s
A
interest payments of old issue
B
weighted cost of capital
C
interest payments of new issue
D
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:

Choose correct answer/s
A
new, lower interest rate bonds
B
new corporate stock
C
a cash payoff
D
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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