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Problem:

Start with the partial model in the file Ch20 P06 Build a Model.xls. on the textbook's Web site. Schumman Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold years ago. Its amortizing $4.5 million floatation costs on the 10% bond over the issue's 30-year life. Shaumman's investment bankers have indicated that the companycould sell a new 22-year issue at an interest rate of 8% in today's market . Neither they or Schumann's management anticipate that interest rate will fall below 6 percent anytime soon, but there is a chance that interest rates will increase.

Required:

Question 1: Perform a complete bond refunding analysis. What is the bond refunding's NPV?

Question 2: At what interest rate on the new debt is the NPV of the refunding no longer positive?

Note: Please provide through step by step calculations.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169555

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