Consider yourself the CFO of ToughNut Corp. Management is considering whether the company should refund its $600,000, 12.50% coupon, 10 year bond issue that was sold at par 3 years ago. The flotation cost on this issue waS $3,000 THAT HAS BEEN AMORTIZING on a straight-line basis over the 10year orginal life of the issue. ToughNut Corp. has a tax rate of 35%, and current short term rates are 6%. You have collected the following data about existing bond and the potential new bond issue:

	existing bond	new bond
capital	$600,000	$600,000
flotation cost	$3,000	$2,650
maturity	10	8
years since issue	3	0
coupon	12.50%	7.50%
call premium	10.00%	-
after-tax cost of new debt	-	4.88%

The assoicate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you. Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and earns no interest on short-term investments. Check if the calculations that the financial analyst submitted are correct and match your analysis. Check each box that has a correct value. If a value is incorrect, do not check the corresponding box. Step 1: Determining the initial investment outlay

	before tax	after tax	check if correct
investment outlay
call premium on the old bond	-$60,000	-$39,000
Flotation Cost on new issue	-$2,650	$2,650
Immediate tax savs on old flotation cost expenses	$2,100	$735
Total after-tax investment		-40,915

Step 2: calculating the annual flotation cost tax effects 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8years. Thus, the after-tax saving every year for the next 8years will be________. 2. ToughNut Corp. However will no linger recieve a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of ___________. 3. The net amortozation tax effeect on the flotation cost is the difference between the old and the new issue, which is ________per year for the next __________years. If the company issues new bonds, the tax savings from amortizing the flotation cost will __________ (increase or decrease).

Step 3: Calculating the annual interest savings 1. The annual coupon payments on the old bonds were $75,000. Thus, the after-tax interest on the old issue is __________. 2. The after-tax interest on the new bond is _______________. 3. Thus, the net annual interest savings after tax will be _______________. a. $19,500.00 b. 25,350.00 c. 23,400.00 d. 21,450.00 At the final stage of the refunding anaysis, you need to calculate the net present values (NPVs) of the savings and costs and the NPV of the entire refunding operation. Step 4: Calculating the NPV of the refunding

Preseent Value of amortized tax effects	?
Present value of interest savings	?
Net investment outlay	-$40,915
NPV from refunding	?