The Bowman Corporation has a bond obligation of $26 million outstanding, which i
ID: 2649864 • Letter: T
Question
The Bowman Corporation has a bond obligation of $26 million outstanding, which it is considering refunding. Though the bonds were initially issued at 11 percent, the interest rates on similar issues have declined to 9.9 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a call premium of 7 percent on the old issue. The underwriting cost on the new $26,000,000 issue is $560,000, and the underwriting cost on the old issue was $450,000. The company is in a 35 percent tax bracket, and it will use an 10 percent discount rate (rounded aftertax cost of debt) to analyze the refunding decision. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Calculate the present value of total outflows. (Do not round intermediate calculations and round your answer to 2 decimal places.)
Calculate the present value of total inflows. (Do not round intermediate calculations and round your answer to 2 decimal places.)
Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
The Bowman Corporation has a bond obligation of $26 million outstanding, which it is considering refunding. Though the bonds were initially issued at 11 percent, the interest rates on similar issues have declined to 9.9 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a call premium of 7 percent on the old issue. The underwriting cost on the new $26,000,000 issue is $560,000, and the underwriting cost on the old issue was $450,000. The company is in a 35 percent tax bracket, and it will use an 10 percent discount rate (rounded aftertax cost of debt) to analyze the refunding decision. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
Answer
a) Calculate the present value of total outflows.
Particulars
Call premium after tax
Interest on old bond after tax
Interest cost on new bond after tax
New Underwriting cost and its tax benefit
Old underwriting cost unamortised tax benefit and loss
Cashflow
Discount rate 10%
Present value
Formula
(-26000000*0.07)*0.65
(26000000*0.11)*0.65
(-26000000*0.099)*0.65
(560000/10)*0.35
(-450000/20)*0.35
A
B
C
D
E
F
G
F*G
Year
A+B+C+D+E
0
-1183000
0
0
-560000
0
-1743000
1
-1743000.00
1
0
0
-1673100
0
-7875
-1680975
0.91
-1528159.09
2
0
0
-1673100
0
-7875
-1680975
0.83
-1389235.54
3
0
0
-1673100
0
-7875
-1680975
0.75
-1262941.40
4
0
0
-1673100
0
-7875
-1680975
0.68
-1148128.54
5
0
0
-1673100
0
-7875
-1680975
0.62
-1043753.22
6
0
0
-1673100
0
-7875
-1680975
0.56
-948866.56
7
0
0
-1673100
0
-7875
-1680975
0.51
-862605.97
8
0
0
-1673100
0
-7875
-1680975
0.47
-784187.24
9
0
0
-1673100
0
-7875
-1680975
0.42
-712897.49
10
0
0
-1673100
0
-7875
-1680975
0.39
-648088.63
Present value of outflow
-12071863.69
b) Calculate the present value of total inflows.
Particulars
Call premium after tax
Interest on old bond after tax
Interest cost on new bond after tax
New Underwriting cost and its tax benefit
Old underwriting cost unamortised tax benefit and loss
Cashflow
Discount rate 10%
Present value
Formula
(-26000000*0.07)*0.65
(26000000*0.11)*0.65
(-26000000*0.099)*0.65
(560000/10)*0.35
(-450000/20)*0.35
A
B
C
D
E
F
G
F*G
Year
A+B+C+D+E
0
0
0
0
0
78750
78750
1
78750.00
1
0
1859000
0
19600
0
1878600
0.91
1707818.18
2
0
1859000
0
19600
0
1878600
0.83
1552561.98
3
0
1859000
0
19600
0
1878600
0.75
1411419.98
4
0
1859000
0
19600
0
1878600
0.68
1283109.08
5
0
1859000
0
19600
0
1878600
0.62
1166462.80
6
0
1859000
0
19600
0
1878600
0.56
1060420.72
7
0
1859000
0
19600
0
1878600
0.51
964018.84
8
0
1859000
0
19600
0
1878600
0.47
876380.76
9
0
1859000
0
19600
0
1878600
0.42
796709.79
10
0
1859000
0
19600
0
1878600
0.39
724281.62
Present value of inflow
11621933.76
C) Calculate the net present value.
Particulars
Call premium after tax
Interest on old bond after tax
Interest cost on new bond after tax
New Underwriting cost and its tax benefit
Old underwriting cost unamortised tax benefit and loss
Cashflow
Discount rate 10%
Present value
Formula
(-26000000*0.07)*0.65
(26000000*0.11)*0.65
(-26000000*0.099)*0.65
(560000/10)*0.35
(-450000/20)*0.35
A
B
C
D
E
F
G
F*G
Year
A+B+C+D+E
0
-1183000
0
0
-560000
78750
-1664250
1
-1664250.00
1
0
1859000
-1673100
19600
-7875
197625
0.91
179659.09
2
0
1859000
-1673100
19600
-7875
197625
0.83
163326.45
3
0
1859000
-1673100
19600
-7875
197625
0.75
148478.59
4
0
1859000
-1673100
19600
-7875
197625
0.68
134980.53
5
0
1859000
-1673100
19600
-7875
197625
0.62
122709.58
6
0
1859000
-1673100
19600
-7875
197625
0.56
111554.16
7
0
1859000
-1673100
19600
-7875
197625
0.51
101412.87
8
0
1859000
-1673100
19600
-7875
197625
0.47
92193.52
9
0
1859000
-1673100
19600
-7875
197625
0.42
83812.29
10
0
1859000
-1673100
19600
-7875
197625
0.39
76192.99
NPV
-449929.93
d)
NPV is negative ( -449,929.93). So the old issue should not be refunded with new debt
Particulars
Call premium after tax
Interest on old bond after tax
Interest cost on new bond after tax
New Underwriting cost and its tax benefit
Old underwriting cost unamortised tax benefit and loss
Cashflow
Discount rate 10%
Present value
Formula
(-26000000*0.07)*0.65
(26000000*0.11)*0.65
(-26000000*0.099)*0.65
(560000/10)*0.35
(-450000/20)*0.35
A
B
C
D
E
F
G
F*G
Year
A+B+C+D+E
0
-1183000
0
0
-560000
0
-1743000
1
-1743000.00
1
0
0
-1673100
0
-7875
-1680975
0.91
-1528159.09
2
0
0
-1673100
0
-7875
-1680975
0.83
-1389235.54
3
0
0
-1673100
0
-7875
-1680975
0.75
-1262941.40
4
0
0
-1673100
0
-7875
-1680975
0.68
-1148128.54
5
0
0
-1673100
0
-7875
-1680975
0.62
-1043753.22
6
0
0
-1673100
0
-7875
-1680975
0.56
-948866.56
7
0
0
-1673100
0
-7875
-1680975
0.51
-862605.97
8
0
0
-1673100
0
-7875
-1680975
0.47
-784187.24
9
0
0
-1673100
0
-7875
-1680975
0.42
-712897.49
10
0
0
-1673100
0
-7875
-1680975
0.39
-648088.63
Present value of outflow
-12071863.69
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.