Mason Manufacturing is contemp

Mason Manufacturing is contemplating offering a new $60 millionbond issue to replace an outstanding $60 million bond issue. Thefirm wishes to do this to take advantage of the decline in interestrates that has occurred since the initial bond issuance. The oldand new bonds are described below. The firm is in the 30 per centtax bracket.

Old bonds. The outstanding bonds have a $1,000par value and a 7.5 per cent coupon interest rate.

They were issued three years ago with a 15-year maturity. Theywere initially sold for their par value of $1,000, and the firmincurred $345,000 in floatation costs. They are callable at$1,070.

New bonds. The new bonds would have a $1,000par value, a 6 per cent coupon interest rate, and a 12-yearmaturity. They could be sold at their par value. The floatationcost of the new bonds would be $360,000. The firm expects to havetwo months of overlapping interest.


a. Calculate the initial investment that is required to call theold bonds & issue the new bonds.

b. Calculate the annual cashflow savings, if any, expected formthe proposed bond refunding decision.

c. Would you recommend the proposed refunding? Why? Show yourcalculations clearly to explain your answer.

please Don’t give me the answer from somewhere else in Chegg,I’ve already checked them and I don’t like the way they wrote itand I think they were not correct!


I have explained each and every step indetail, if you face any doubt please comment in box. Thank you!!

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