The Sunbelt Corporation has $32 million of bonds outstanding that were issued at a coupon rate of 10.975 percent seven years ago. Interest rates have fallen to 10.40 percent. Mr. Heath, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Mr. Heath would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Sunbelt Corporation has a tax rate of 36 percent. The underwriting cost on the old issue was 2.5 percent of the total bond value. The underwriting cost on the new issue will be 11 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 7 percent call premium starting in the sixth year and scheduled to decline by one- half percent each year thereafter (consider the bond to be seven years old for purposes of computing the premium). Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent (eg. 4.06 percent should be rounded up to 5 percent). a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) Discount rate
The Sunbelt Corporation has $32 million of bonds outstanding that were issued at a coupon rate of 10.975 percent seven years ago. Interest rates have fallen to 10.40 percent. Mr. Heath, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Mr. Heath would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Sunbelt Corporation has a tax rate of 36 percent. The underwriting cost on the old issue was 2.5 percent of the total bond value. The underwriting cost on the new issue will be 11 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 7 percent call premium starting in the sixth year and scheduled to decline by one- half percent each year thereafter (consider the bond to be seven years old for purposes of computing the premium). Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent (eg. 4.06 percent should be rounded up to 5 percent). a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) Discount rate
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Transcribed Image Text:c. Calculate the present value of total inflows. (Do not round intermediate calculations and round your answer to 2 decimal places.)
PV of total inflows
d. Calculate the net present value (Negative amount should be indicated by a minus sign. Do not round intermediate calculations
and round your answer to 2 decimal places.)
Net present value
e. Should the Sunbelt Corporation refund the old issue?
Yes
Transcribed Image Text:The Sunbelt Corporation has $32 million of bonds outstanding that were issued at a coupon rate of 10.975 percent seven years ago.
Interest rates have fallen to 10.40 percent. Mr. Heath, the Vice-President of Finance, does not expect rates to fall any further. The
bonds have 18 years left to maturity, and Mr Heath would like to refund the bonds with a new issue of equal amount also having 18
years to maturity. The Sunbelt Corporation has a tax rate of 36 percent. The underwriting cost on the old issue was 2.5 percent of the
total bond value. The underwriting cost on the new issue will be 11 percent of the total bond value. The original bond indenture
contained a five-year protection against a call, with a 7 percent call premium starting in the sixth year and scheduled to decline by one-
half percent each year thereafter (consider the bond to be seven years old for purposes of computing the premium). Use Appendix D
for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the discount
rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent (eg. 4.06 percent should be rounded up to 5
percent).
a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest
whole percent.)
Discount rate
b. Calculate the present value of total outflows. (Do not round intermediate calculations and round your answer to 2 decimal
places.)
PV of total outflows
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