Clinch River Power is considering refunding a $150 million 12% coupon bond with a 10% coupon bond, 20 year bond.The current bond also matures in 20 years and is now callable at 110% of par.The unamortized flotation cost on the old issue is $540,000 and the flotation cost of the new issue is 0.925%.Clinch River estimates that there would be a 4 week period where both bonds would be outstanding.The company has a weighted cost of capital of 11% and a 40% marginal tax rate.Should Clinch River sell the refunding issue?
A)Yes, NPV is approximately $9.838 million
B)Yes, NPV is approximately $9.930 million
C)Yes, NPV is approximately $9.655 million
D)Yes, NPV is approximately $10.808 million

Question

Quizplus · Accepted Answer

PV Interest saved = $150(0.02)(0.6)(11.47) $20,646,000
A.T. call premium = $150(0.10)(0.6) $ 9,000,000
PV flotation = $150(0.00925) - ($1.3875/20)(0.4)(11.47) 1,069,208
PV, old issue = ($0.54/20)(0.4)(11.47) - $0.54(0.4) -92,124
Overlapping interest = $150(0.072)(4/52) 830,769
Net investment $ 10,807,853
NPV of refunding = $20,646,000 - 10,807,853 $ 9,838,147

Clinch River Power Is Considering Refunding a $150 Million 12