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Name ______________________________ Name ______________________________ Capital Markets (Part II) (32 pts.: XXXXXXXXXXpts) 5. One year ago Snare Inc., issued $100 million of 11-year bonds with a 9.5%...

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Name ______________________________
Name ______________________________
Capital Markets (Part II)
(32 pts.: XXXXXXXXXXpts)
5. One year ago Snare 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
eginning today. Floatation costs on that issue were $1 million. Snare Inc., has a 38% marginal
tax rate. Since interest rates have fallen, Snare Inc., is considering calling in the bonds and
efinancing at cu
ent rates. It has two, ten-year, financing alternatives.
1) A $100 million public issue of 8% annual coupon bonds. Flotation costs would be $1
million.
2) An 8%, $100 million private placement with semi-annual coupons. There would be a
front-end placement fee of $500,000.
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.
Questions:
a) Calculate the effective cost of raising funds from the public bond issue. Use the IRR
procedure for all your calculations. Calculate to at least four decimal places of
accuracy.
) Calculate the effective cost of raising funds from the private placement of debt.
Calculate to at least four decimal places of accuracy.
c) If Snare Inc., does call in the bonds, which of the two refinancing alternatives is
preferable?
d) What is the effective, after-tax cost of leaving the existing bonds in place? In othe
words, what would be the after-tax all-in cost of refinancing that would make
Snare Inc., indifferent between calling the bonds and leaving them in place?
Calculate to at least four decimal places of accuracy.
e) Should Snare Inc., call in the bonds?
capital-markets-assignment-part-ii-zo3wzvs2.pdf 20201029160249-ofkk3mwg-n33ohud2.jpg
Answered Same Day Oct 27, 2021

Solution

Ishmeet Singh answered on Nov 06 2021
143 Votes
Part a
    Rate    8%
    Tax Rate    38%
    Years    0    1    2    3    4    5    6    7    8    9    10
    Fund Raised    $100,000,000
    Floatation Cost    ($1,000,000)
    Annual Coupon Payment        ($8,000,000)    ($8,000,000)    ($8,000,000)    ($8,000,000)    ($8,000,000)    ($8,000,000)    ($8,000,000)    ($8,000,000)    ($8,000,000)    ($108,000,000)
    Tax Benefit on Coupon
Payment        $3,040,000    $3,040,000    $3,040,000    $3,040,000    $3,040,000    $3,040,000    $3,040,000    $3,040,000    $3,040,000    $3,040,000
    Tax Benefit on Ammortization
Floatation        $38,000    $38,000    $38,000    $38,000    $38,000    $38,000    $38,000    $38,000    $38,000    $38,000
    Total    $99,000,000    -$4,922,000    -$4,922,000    -$4,922,000    -$4,922,000    -$4,922,000    -$4,922,000    -$4,922,000    -$4,922,000    -$4,922,000    -$104,922,000
    IRR    5.0518%
Part
    Rate    8.0%
    Tax Rate    38%
    Years    0    1    2    3    4    5    6    7    8    9    10    11    12    13    14    15    16    17    18    19    20
    Fund Raised    $100,000,000
    Floatation Cost    ($500,000)
    Semi Annual Coupon...
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