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Many companies look to re-finance their outstanding debt when interest rates fall significantly. Javert Toy Company has $50.00 million in debt outstanding that pays an 8.50% APR coupon. The debt has an average maturity of 10.00 years. The firm can refinance at an annual rate of 5.25%. That is, investors want 5.25% today for bonds of similar risk and maturity. How much will Javert Toy company pay to buy back its current outstanding bonds

Respuesta :

Answer:

Javert Toy Company requires $62.4 million to buy back its current outstanding bonds.

Explanation:

The calculation above was aided by the use of pv function in excel that require below inputs:

Face of the debt=$50m

Years to maturity=10

Yield(discount factor)=5.25%

Coupon rate=8.5%

Coupon payment=Coupon rate *face value=50m*8,5%=$4.25m

Note that the formula requires a negative sign so as to return a positive answer.

Find attached spreadsheet showing detailed calculations.

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