Suppose the Builders-R-Us Real Estate Finance Corporation has $60 million worth

Question

Suppose the Builders-R-Us Real Estate Finance Corporation has $60 million worth of bonds outstanding with an annual coupon interest rate of 8 percent. However, market interest rates have fallen to 6 percent since the bonds were issued 10 years ago. Accordingly, Builders-R-Us would like to replace the old 8 percent bonds with a new issue of 6 percent bonds. The relevant financial data are summarized here: s The Builders-R-Us Corporation will be issuing new bonds having the same maturity as the number of years remaining to maturity on the old bonds. What are the total cash outflows that Builders-R-Us will incur at time zero if the company implements the proposed bond refunding program? What is the annual before-tax savings in interest payments that Builders-R-Us would realize? What is the annual after-tax savings in interest payments that Builders-R-Us would realize? What is the present value of the annual after-tax interest savings? What are the annual tax savings on the call premium that will be paid in the refunding program? What is the present value of the annual tax savings on the call premium? What are the net tax savings from writing off the balance of the old bond underwriting costs? What are the tax savings from the new bond underwriting costs? What is the present value of the tax savings from the new bond underwriting costs? What is the present value of the total cash inflows that will occur if the bond refunding program is implemented? What is the net present value of the proposed bond refunding program? Would you advise Builders-R-Us to proceed with the program?

Explanation / Answer

a)

60 million

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