old issue: $40 million face value, 10% annual coupon, 25 year bond, issued 5 years back. Bond has remaining life of 20 years. Floatation cost of 6% was incurred at time of issue and it is being straight line amortized over the 25 year life of the bond. The Old issue can be called today by paying a call premium of 11% of face value New Issue: 20 year life, 8.6% annual coupon bonds. Floatation cost of the new issue is 7% of the face value, and the floatation cost will be straight line amortized over the life of the issue. Corporate tax rate is 40% Assume that interest (coupon) payments are made once per year. Floatation cost will be amortized once per year. The new bond will sell in the market at its face value, and thus, will have YTM equal to its coupon rate Should the firm recall the existing bond and issue the new bond? Base your answer on NPV analysis of refunding. Follow the exact steps shown in the handout in class. (Enter numbers in blank cells, not in blocked cells) Intermediate Calculations Cash Flows in (out) TIME 0 CASH FLOWS: (a) Call premium for old issue- After-tax outflow => Floatation cost new issue => Floatation cost of old issue - Annual amortization expense Accumulated amortization over past 5 years- Unamortized part of old issue floatation cost- Tax saving due to expensing unamortized floatation cost -> (b) (c) (d) Net after-tax cash outlay to refund the old issue> ANNUAL CASH FLOWS: (e) Float cost new/year- Float cost old /year- Incremental floatation cost (new- old) Tax liability or saving due to incremental floatation cost> (f) Interest expense for new/year- Interest expense old/year- Interest saved by issuing the new bond- After-tax interest saving/year> Net annual Cash Flow-> (g) PV OF INFLOWs: The before-tax YTM on new debt coupon of new bonds After-tax YTM- PMT- (h) NPV of refunding PV of inflows - PV of outflows->