Robert Mondavi Company is using bonds to collect capital for its untried developments. Robert Mondavi was write up bonds many times in distinguishable quantities and every issue has different coupon rate, only some of them are due as well as different issues have different maturities.
To demonstrate how bond refunding batch works and how borderer can save money and improve its cash fall down I used assumptions provided in our instructions and I also reliable that Robert Mondavi has only one bond issuance that has 10% vocal premium, 10% coupon rate and 20 years maturity.
To project if the ships company should refund its bond debt we desire to find show up how often would be the cost of calling the oldish bonds, how much would be the cost of the new bonds. When we know how much would company have to spend on those operations and how much would be the saving from bonds with the smaller coupons we need to compare those numbers and thusly we can say if there is a chance that the company could save on refinancing.
When we calculating operation of recalling old bonds and publicize new bonds we can start from the call premium which would be probably the biggest expense.
In our case call premium is 10% therefore Robert Mondavi will need to pay $31,617 however it need to be adjusted with tax since it is deductible expense. After tolerance we learn that RMC will pay $18,970 as a call premium. Another cost of this operation is flotation cost of the new issue and that is 5% what gives us $15,808 but this time it is not deductible. Next, we need to calculate immediate savings on old flotation cost expenses and that will improve our cash flow and it will be showed as an after tax...
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