Financial Management

Start with the partial model in the file Ch20 P06 Build a Model.xls. on the textbook\'s Web site. Schumman Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold years ago. Its amortizing $4.5 million floatation costs on the 10% bond over the issue\'s 30-year life. Shaumman\'s investment bankers have indicated that the companycould sell a new 22-year issue at an interest rate of 8% in today\'s market . Neither they or Schumann\'s management anticipate that interest rate will fall below 6 percent anytime soon, but there is a chance that interest rates will increase.

A. Perform a complete bond refunding analysis. What is the bond refunding\'s NPV?

B. At what interest rate on the new debt is the NPV of the refunding no longer positive?

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700000000.1302245000000.10.40.0822500000010.05Par valueCoupon rateTax rateCall premiuma. Perform a complete bond refunding analysis. What is the bond refunding\'s NPV?You get to expense the remaining flotation costsThis is interest paid on the old bond issue between when the new bonds are issued and the old bonds are retiredThis is interest earned on the proceeds from the new bonds before they are used to pay off the old bonds.Initial investment outlay to refund old issue:Annual Flotation Cost Tax Effects:Annual interest savings due to refunding:\"Break-even\" interest rate =NPV of refunding decision =Annual cash flows =Net after tax interest savings =Annual after tax interest on new bond =Annual after tax interest on old bond =Annual tax savings on new flotation =Tax savings lost on old flotation =Total amortization tax effects =Call premium on old issue =After-tax call premium =New flotation cost =Old flotation costs already expensed =Remaining flotation costs to expense =Tax savings from old flotation costs =Additional interest on old issue after tax =Interest earned on investment in T-bonds after tax =Total investment outlay =Time between issuing new bonds and calling old bonds (months)Rate earned on proceeds of new bonds before calling old bonds (annual)After-tax cost of new debt =A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann\'s marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.Coupon rateOriginal maturityRemaining maturityOriginal flotation costsCurrent bond issue dataMaturityFlotation costsRefunding dataUse Goal Seek to set cell D60 to zero by changing cell C27.Schumann Shoe Manufacturer...

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