The Bowman Corporation has a bond obligation of $16 million outstanding, which it is considering refunding....

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The Bowman Corporation has a bond obligation of $16 millionoutstanding, which it is considering refunding. Though the bondswere initially issued at 13 percent, the interest rates on similarissues have declined to 11.8 percent. The bonds were originallyissued for 20 years and have 10 years remaining. The new issuewould be for 10 years. There is a call premium of 9 percent on theold issue. The underwriting cost on the new $16,000,000 issue is$460,000, and the underwriting cost on the old issue was $350,000.The company is in a 35 percent tax bracket, and it will use an 10percent discount rate (rounded aftertax cost of debt) to analyzethe refunding decision. Use Appendix D for an approximate answerbut calculate your final answer using the formula and financialcalculator methods.
A. Calculate the present value of total outflows to 2 decimalplaces
PV of total outflows_
B. Calculate the present value of total inflows to 2 decimalplaces
PV of total outflows
c. Calculate the net present value.(Negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answer to 2decimal places.)
NPV ____
D. should the old issue be refunded with newdebt?
yes or no

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3.7 Ratings (498 Votes)


	Present Value of outflows:
	Bond outstanding	$16,000,000
	Call premium (9%)	$1,440,000
	Underwriting cost	$460,000
A	Present Value of total outflows:	$17,900,000

	Current coupon payment per year	$2,080,000	(16000000*13%)
	Coupon Payment for new issue per year	$1,888,000	(16000000*11.8%)
	Saving in coupon payment per year	$192,000
Pmt	Annual After Tax Savings =192000*(1-Tax Rate)	$124,800
Nper	Number of years of savings	10
Rate	After tax cost of debt =11.8*(1-0.35)	7.67%
PV	Present Value of after tax savings	$850,027.27	(Using PV function of excel with Rate=7.67%, Nper=10,Pmt=-124800)
	Excel Command: PV(7.67%,10,-124800)
	Present Value of Inflows:
	Cash from new issue	$16,000,000
	Present Value of annual savings	$850,027.27
B	Present Value of total Inflows:	$16,850,027.27

C	Net Present value=	($1,049,972.73)	(16850027.27-17900000)

D	No, old issue should not be refunded with new debt

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The Bowman Corporation has a bond obligation of $16 millionoutstanding, which it is considering refunding. Though the bondswere initially issued at 13 percent, the interest rates on similarissues have declined to 11.8 percent. The bonds were originallyissued for 20 years and have 10 years remaining. The new issuewould be for 10 years. There is a call premium of 9 percent on theold issue. The underwriting cost on the new $16,000,000 issue is$460,000, and the underwriting cost on the old issue was $350,000.The company is in a 35 percent tax bracket, and it will use an 10percent discount rate (rounded aftertax cost of debt) to analyzethe refunding decision. Use Appendix D for an approximate answerbut calculate your final answer using the formula and financialcalculator methods.A. Calculate the present value of total outflows to 2 decimalplacesPV of total outflows_____________B. Calculate the present value of total inflows to 2 decimalplacesPV of total outflows __________________c. Calculate the net present value.(Negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answer to 2decimal places.)NPV ______________D. should the old issue be refunded with newdebt?yes or no