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Foundations Of Financial Management
Found in: Page 532
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

d. In terms of the refunding decision, how should Barton be influenced if he thinks interest rates might go down even more?

The company should wait for utilising the refunding option if they believe that the interest rates will go down as it will help in saving their costs.

See the step by step solution

Step by Step Solution

Step 1: Meaning of bond interest rates

The bond interest rate is the rate of interest that the issuer pays to the bondholder. The rate of interest is calculated based on the face value of the bonds and this interest rate is benefit for the bondholder for investing their funds.

Step 2: Decision regarding refunding if the interest rate falls

If the interest rates go down, then it will reduce the cost of borrowing and the interest savings of the company will increase but the company should also consider that if the interest rates will move up its cost of borrowing will also increase.

Most popular questions for Business-studies Textbooks

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)


Cost of goods sold


Gross profit


Selling and administrative expenses


Operating profit


Interest expense


Net income before taxes




Net income


Bailey corporation

Balance sheet

As of December 31, 20X1


Current assets:



Marketable securities


Accounts receivables




Total current assets


Net plant and equipment


Total assets


Liabilities and stockholders’ equity

Current liabilities:

Accounts payable


Notes payable


Total current liabilities


Long-term liabilities


Total liabilities


Stockholder’s equity:

Common stock (1,800,000 shares at $1 par)


Capital in excess of par


Retained earnings


Total stockholder’s equity


Total liabilities and stockholder’s equity


a. Assume that 800,000 new corporate shares will be issued to the general public. What will earnings per share be immediately after the public offering? (Round to two places to the right of the decimal point.) Based on the price-earnings ratio of 12, what will the initial price of the stock be? Use earnings per share after the distribution in the calculation.


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