accounts data bank

accounts data bank

Question # 00003459 Posted By: spqr Updated on: 11/12/2013 11:39 AM Due on: 11/30/2013
Subject Accounting Topic Accounting Tutorials:
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Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue's 30-year life. Schumann's investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today's market. Neither they nor Schumann's management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase.


A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann's marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.

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

b. At what interest rate on the new debt is the NPV of the refunding no longer positive?

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  1. spqr
    Tutorial # 00003266 Posted By: spqr Posted on: 11/12/2013 11:40 AM
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