3.67 points Problem 16-17 Refunding decision (LO3 The Bowman Corporation has a b

Question

3.67 points Problem 16-17 Refunding decision (LO3 The Bowman Corporation has a bond obligation of $17 milion outstanding, which·is considemg initially at 10 percent, the interest rates on simiar The issue would be for 10 years. There is a cal premium of 9 percent on the old issue. The underwriting cost on the new $17,000,000 issue is $470,000, and the underwriting cost on the old issue was $360,000 ent tax brac ket, and t will use an 9 percent discount rate (rounded anertax cost for an approximate answer but cakculate your of debt) to analyze the refunding decision. Use Appendix D f inal answer using the formula and financial calculator methods a. calk ulate the present value of total outhiows. (Do not round intermediste calculations and round your answer to 2 decimal places.) b. Calculate the present value of total inflows (Do not round intermediate calculations and round your answer to 2 decimal places) c. 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.) d. Should the old issue be refunded with new debt? 0 O Yes O No

Explanation / Answer

   

   

  

a. Net cost of call premium = (Call premium rate × Face value of issue) × (1 – Tax rate) = (.09 × $17,000,000) × (1 – .35) = $994,500 Underwriting expenditure = Underwriting cost (New issue) = $470,000 Annual tax savings New issue = (Underwriting cost New issue / Issue years) × Tax rate = ($470,000 / 10) * .35 = $16,450 PV of tax savings New issue = Annual tax savings New issue * ({1 – [1 / (1 + i)n]} / i) = $16,450 * ({1 – [1 / (1.09)10]} / .09) = $ 105,570.5

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