Question

11. Refunding analysis Aa Aa Consider yourself the CFO of ToughNut Corp. Management is considering whether the company should refund its $600,000, 12.50% coupon, 10-year bond issue that was sold at par 3 years ago. The flotation cost on this issue was $3,000 that has been amortizing on a straight-line basis over the 10-year original life of the issue. ToughNut Corp has a tax rate of 30%, and current short-term rates are 6% You have collected the following data about the existing bond and the potential new bond issue: Data Collected Existing Bond $600,000 $3,000 10 New Bond $600,000 $2,650 Capital Flotation cost Maturity Years since issue Coupon Call premium After-tax cost of new debt 12.50% 7.50% 10.00% 5.25% The associate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you. Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and earns no interest on short-term investments. Check if the calculations that the financial analyst submitted are correct and match your analysis. Check each box that has a correct value. If a value is incorrect, do not check the corresponding box