Dovu construction company ltd made a 100 million bond issue 5years ago when interest rates were substantially high. The interest rate have now fallen and the firm wishes to retire this old debt and replace it with a new and cheaper one. given here below are details about the two bond issues:
Old bonds the outstanding bonds have a nominal value of sh 1000 and 24% coupon interest rate. they were issued 5 years ago within a 15-year maturity. They were initially sold at their nominal value of sh 1000 and the firm incurred 390000 in floatation costs. They are callable at 1120.
New bonds: the new bonds would have a 1000 nominal value and a 20% coupon interest rate. they would have a 10-year maturity and could be sold at their par value. the issuances cost of the new bonds would be 525000.assume the firm firm does not expect to have any overlapping interest and is in the 35% tax bracket
Calculate the rate after tax inflows expected from the unamortized portion of old bonds issuance cost
Calculate the annual after tax inflows from the issuance cost of the new bonds assuming the 10-year amortization
Calculate the after tax cash flow from the call premium required to retire the old bonds
Determine the incremental initial cash outlay required to issue the new bonds
Calculate the annual cash flow savings, if any expected from the bond refunding.