BBC issues $4,000,000 perpetual debt that pays 12% annual coupon. The yield of the debt is 12% now. At the end of year 1, the yield may be 15% (60% probability) or 8% (40% probability). a) What is market value of the debt? b) If the debt is callable at 108% of par at the end of year 1, what is its market value? c) Assume that the yield changes to 8% at the end of year 1, BBC replaces the debt with a new debt. The flotation cost is $50,000. The new debt will be parked in the money market to earns 4% interest over the 30-day overlap period. BBC's tax rate is 30%. What is the NPV of the debt refund?

BBC issues $4,000,000 perpetual debt that pays 12% annual coupon. The yield of the debt is 12% now. At the end of year 1, the yield may be 15% (60% probability) or 8% (40% probability). a) What is market value of the debt? b) If the debt is callable at 108% of par at the end of year 1, what is its market value? c) Assume that the yield changes to 8% at the end of year 1, BBC replaces the debt with a new debt. The flotation cost is $50,000. The new debt will be parked in the money market to earns 4% interest over the 30-day overlap period. BBC's tax rate is 30%. What is the NPV of the debt refund?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 14P

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