The Berlin Brewing Company was purchased three years ago in a leveraged buy-out
ID: 2802779 • Letter: T
Question
The Berlin Brewing Company was purchased three years ago in a leveraged buy-out resulting in long-term debt for the Company of $500 million. The debt is divided between $400 million of senior debt with an interest rate of 6%, and subordinated debt of $100 million with an interest rate of 12%. Interest on both notes is paid quarterly. No principal payments are required on the debt until maturity, which will occur in another two years, at which time the entire $500 million balance will need to be paid off or re-financed. The Company can refinance its total debt today (meaning it will borrow money to pay-off the two existing loans) into a single class of senior notes that mature in two years with an interest rate of 7% and no principal payments due until maturity. Interest on the new senior notes would be due quarterly. It will have to pay a $7.5 million transaction fee in order to refinance.
Should it refinance now or wait until maturity of the current notes, and why? Please show steps in solving.
Explanation / Answer
6% Senior 12% Subordinated 7% New Note Debt(Million) 400 100 500 Refinance Cost (Million) 7.5 If existing than total [payment of interest will be Rate of int 6% 12% Total Year Int. on 400 Int. on 100 1 6 3 9 Million 2 6 3 9 Million 3 6 3 9 Million 4 6 3 9 Million 5 6 3 9 Million 6 6 3 9 Million 7 6 3 9 Million 8 6 3 9 Million Total Payment of Interest 72 Million If Refin. Rate of int 7% Year Int. on 500 1 8.75 Million 2 8.75 Million 3 8.75 Million 4 8.75 Million 5 8.75 Million 6 8.75 Million 7 8.75 Million 8 8.75 Million Total Interest 70.00 Million Refinance cost 7.50 Million Total Cost 77.50 Million So if we go for refinance we will lose 77.5-72=5.5 Million, So it is better to wait until maturity of the current notes
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