Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Q16-1CP-d.

Expert-verified
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)

$42,680,000

Cost of goods sold

$32,240,000

Gross profit

$10,440,000

Selling and administrative expenses

$4,558,000

Operating profit

$5,882,000

Interest expense

$600,000

Net income before taxes

$5,282,000

Taxes

$2,120,000

Net income

$3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

$250,000

Marketable securities

$130,000

Accounts receivables

$6,000,000

Inventory

$8,300,000

Total current assets

$14,680,000

Net plant and equipment

$13,970,000

Total assets

$28,650,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$3,800,000

Notes payable

$3,550,000

Total current liabilities

$7,350,000

Long-term liabilities

$5,620,000

Total liabilities

$12,970,000

Stockholder’s equity:

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

$1,800,000

Capital in excess of par

$6,300,000

Retained earnings

$7,580,000

Total stockholder’s equity

$15,680,000

Total liabilities and stockholder’s equity

$28,650,000

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.

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.