please show steps, my NPV is $1,086,029, please verify it. thanks! Labs Inc. has
ID: 1171049 • Letter: P
Question
please show steps,
my NPV is $1,086,029, please verify it. thanks!
Labs Inc. has a bond outstanding that carries a 10% coupon rate paid annually. Current bonds are yielding 7.5%. It has $30 million outstanding and 12 years left to maturity. A new issue would require $500,000 for floatation costs. An overlap period of 30 days would be anticipated, during which money market rates would be 2.5%. DNA Labs Inc. has a tax rate of 30%. The call premium on the outstanding issue is currently at 10%. Should the bonds be refunded?
Explanation / Answer
Statement showing NPV
Thus bond should be called back
Particulars 0 1 2 3 4 5 6 7 8 9 10 11 12 NPV Call premium -3000000 Floating cost -500000 Interest income(2.7 million *2.5%*30/365) 55479 Savings in interest( 10%-7.5%) 750000 750000 750000 750000 750000 750000 750000 750000 750000 750000 750000 750000 Total -3444521 750000 750000 750000 750000 750000 750000 750000 750000 750000 750000 750000 750000 Tax savings @30% 1033356.2 Tax expense @ 30% -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 After tax cash flow -2411164 525000 525000 525000 525000 525000 525000 525000 525000 525000 525000 525000 525000 PVIF @ 10% 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 NPV -2411164 477273 433884 394440 358582 325984 296349 269408 244916 222651 202410 184009 167281 1166024Related Questions
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