Question

I will be happy if you use excel and show me the calculation process. Please complete in your own style. If u get any info missing or any sequence problem for the question then adjust it or take assumption for it. I hope all info there but still if i miss then do it in your own style. Thanks

Roster Pte Ltd issued 100 million of 11-year bonds with a 9.5% coupon payable annually. This bond was issued a year ago. The first coupon payment has just been paid. The bonds are callable at 105 beginning today. Floatation costs on that issue were $1 million. Roster pte has 38% marginal tax rate. Roster Pte is planning to call the bonds and refinance at current rates. The following 10 years alternatives exist:

a. 100 million public issue of 8% annual coupon bonds. Floatation costs would be one million.

b. 100 million private placement with 8% semi-annual coupons with a placement fee of 500000.

Call premiums and interest payments are tax deductible but the frontend fee and floatation cost must be capitalized and amortized over the life of the bond.

1. What will be the effective cost of raising funds from the public bond issue using IRR ?

2. Effective cost of raising funds from private placement of debt.?

3. What’s the effective after-tax cost of refinancing that would make Roster Pte different calling the bonds and leaving them as it is?

Answer 1

Answer 1

inflow at t = 0,

100million - 1million = 99million (by doing this we are capitalizing the floatation cost)

Out flow Every year for 10 years 8million in coupon payments for 10 years.

Face Value = 100 million.

Using a financial calculator

FV = 100, PV = -99, N = 10, PMT = 8 CPT - I/Y = 8.15%

So IRR for raising funds form public bond issue is 8.15 capitalizing flotation cost.

Answer 2

Inflow at t = 0,

100million - 0.5million = 99.5million (by doing this we are capitalizing the placement fee)

Outflow semiannually for 10 years 4million in coupon payments for 10 years. ie 20 payments

Face Value = 100 million.

Using a financial calculator

FV = 100, PV = -99.5, N = 20, PMT = 4 CPT - I/Y = 4.0369 %

So IRR for raising funds form public bond issue is 2*semmiannual rate = 2* 4.0369 = 8.0738 % capitalizing flotation cost