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One year ago BigBusiness, Inc., issued $100 million of 11-year bonds with a 9.5% coupon payable annually. The first coupon payment has just been paid. The bonds are callable at 105 beginning today. Floatation costs on that issue were $1 million. BigBusiness, Inc. has a 38% marginal tax rate.
Since interest rates have fallen, BigBusiness, Inc. is considering calling in the bonds and refinancing at current rates. It has the following ten-year financing alternative.
-A $100 million public issue of 8% annual coupon bonds. Flotation costs would be $1 million. Note: Call premiums and interest payments are tax deductible. However, front-end fees and floatation costs must be capitalized and amortized over the life of the bond.
What is the effective, after-tax cost of leaving the existing bonds in place? In other words, what would be the after-tax all-in cost of refinancing that would make BigBusiness, Inc. indifferent between calling the bonds and leaving them in place?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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