Worldwide Widget Manufacturing, Inc., decided to go ahead with its plan to expand. It issued $30 million in debt due in 30 years to finance the expansion at an 8 percent coupon rate. The company makes interest - only, semiannual payments of $1,200,000 on this debt.Debt issued today would cost only 7 percent interest. You have been asked to determine whether the company should issue new debt (for 25 years) to pay off the old debt. If the company does so, it will have to pay $1.7 million as a "call premium" to the existing debt holders, and also $1.4 million to its investment bankers to float the issue. If the new debt was issued, what would be the semiannual interest payment savings or cost? What is the cost to refinance the debt? What would be the present value of the semiannual savings in interest payments over the life of the debt? Should you advise the company to replace the old debt with new debt? Why?
Worldwide Widget Manufacturing, Inc., decided to go ahead with its plan to expand. It issued $30 million in debt due in 30 years to finance the expansion at an 8 percent coupon rate. The company makes interest - only, semiannual payments of $1,200,000 on this debt.Debt issued today would cost only 7 percent interest. You have been asked to determine whether the company should issue new debt (for 25 years) to pay off the old debt. If the company does so, it will have to pay $1.7 million as a "call premium" to the existing debt holders, and also $1.4 million to its investment bankers to float the issue. If the new debt was issued, what would be the semiannual interest payment savings or cost? What is the cost to refinance the debt? What would be the present value of the semiannual savings in interest payments over the life of the debt? Should you advise the company to replace the old debt with new debt? Why?
Chapter20: Financing With Derivatives
Section20.B: Bond Refunding Analysis
Problem 1P
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Transcribed Image Text:Worldwide Widget Manufacturing, Inc., decided to go ahead with its plan to
expand. It issued $30 million in debt due in 30 years to finance the expansion at
an 8 percent coupon rate. The company makes interest - only, semiannual
payments of $1,200,000 on this debt.Debt issued today would cost only 7
percent interest. You have been asked to determine whether the company should
issue new debt (for 25 years) to pay off the old debt. If the company does so, it
will have to pay $1.7 million as a "call premium" to the existing debt holders, and
also $1.4 million to its investment bankers to float the issue. If the new debt was
issued, what would be the semiannual interest payment savings or cost? What is
the cost to refinance the debt? What would be the present value of the
semiannual savings in interest payments over the life of the debt? Should you
advise the company to replace the old debt with new debt? Why?
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