(USE EXCEL) Grass Whacker’s is considering whether or not to refund a $90 million, 6 percent coupon, 30 year bond issue that was sold 8 years ago. It is amortizing $1.8 million of flotation costs over the issue’s 30-year life. A new 22-year issue would carry an interest rate of 5.35 percent. A call premium of 5 percent would be required to retire the old bonds and flotation costs on the new issue would be $1.35 million (also to be amortized). Grass Whacker’s marginal tax rate is 34 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term securities returning 1.5 percent annually. What is the NPV of the refund? Use the NPV function in Excel and the PV function in Excel. Answers should be the same.
Assuming that all the costs related to the new issue and refunding the previous issue including premium on call of previous issue, flotation costs of fresh issue and un amortized expenses of previous issue will be allowed to be amortized over the life time of fresh issue.
Summary.
| Old Bonds | New Bonds | |
| Value of Bonds | 90,000,000 | 90,000,000 |
| Interest rate PA | 6% | 5.35% |
| Flotation Costs | 1,800,000 | 1,350,000 |
| Period Yrs | 30 | 22 |
| Period Lapsed Yrs | 8 | 0 |
| Tax Rate | 34% | 34% |
| Overlap time | One month | |
To find out the NPV of the New Issue, let us find out the Savings and Expenses the new issue would result in.
| Old Bonds | New Bonds | |
| Interest rate PA | 6% | 5.35% |
| Interest paid PA | 5,400,000 | 4,815,000 |
| Saving in Interest PA | 585,000 | |
| Un Amortized Flotation costs of old issue | 1,320,000 | 1,320,000 |
| Flotation costs of New Issue | - | 1,350,000 |
| Total Flotation costs to be amortised in 22 yrs | 1,320,000 | 2,670,000 |
| 60,000 | 121,364 | |
| Additional Exp in Flotation costs | 61,363.64 | |
| Call Premium | 0 | 4,500,000 |
| Amortized for 22 yrs | 0 | 204,545.45 |
| Excess Interest Paid in Overlap time | 0 | 425,625 |
| Interest Earned in Overlap time | 0 | 112,500 |
| Net Interest Exp in Overlap time | 0 | 313,125 |
| One time Expenses of the New Issue (Un amortized) | |
| Net Interest Exp in Overlap time | 313,125 |
| After Tax expense (313125*0.66) | 206,662.50 |
| Saving in Interest PA | 585000 |
| Net Expenses Increased every yr | |
| Additional Exp in Flotation costs | 61363.63 |
| Call premium | 204545 |
| Total | 265908.63 |
| Net Savings PA | 319091.37 |
| After Tax savings (Every Year) | 210600.3042 |
Assuming the Discount rate at 9%.
PV of Net Issue = PV(9%,22,210600.3042)-206662.5 = $ 1,988,577.677- 206662.5 = $ 1,781,915.71
NPV of Net Issue =NPV(9%,J237:J258)+J236 = $ 1,781,915.71.
Please use the below data for NPV in excel.
| -206662.5 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
| 210600.3042 |
(USE EXCEL) Grass Whacker’s is considering whether or not to refund a $90 million, 6 percent...
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