The Bowman Corporation has a $18 million bond obligation outstanding, which it is considering refunding.
	Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined
	to 8.5 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 9 percent call premium on the old issue. The underwriting cost on the
	new $18 million issue is $530,000, and the underwriting cost on the old issue was $380,000. The company is
	in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt)
	to analyze the refunding decision.
	a. Calculate the present value of total outflows.
	b. Calculate the present value of total inflows.
	c. Calculate the net present value.
	d. Should the old issue be refunded with new debt?
	Solution
	Problem 16-17
	Instructions
	Use formulas and functions to complete the requirements of this problem.
	Information
	Bond obligation		$18,000,000
	Interest rate on bonds		10%
	Interest rate on new bonds		8.5%
	Call premium		9%
	Tax rate		35%
	Underwriting costs of new issue		$530,000
	Underwriting costs of old issue		$380,000
	Years remaining on bonds		10
	Discount rate		8%
	Outflows
1	After tax cost of call		FORMULA
2	Underwriting cost on new issue
	Actual expenditure		$530,000
	Amortization of Costs		FORMULA
	Present value of future tax savings		FORMULA
	Net cost of underwriting expense		FORMULA
	Inflows
3	Cost savings in lower interest rates:
	Interest on old bonds		FORMULA
	Interest on new bonds		FORMULA
	Savings per year before taxes		FORMULA
	Aftertax Savings per year		FORMULA
	Present value of savings		FORMULA
4	Underwriting cost on old issue
	Original amount			$380,000
	Amount written off over 5 years			FORMULA
	Unamortized old underwriting cost			FORMULA
	Present value of deferred future write-off			FORMULA
	Immediate gain in old underwriting cost write-off			FORMULA
	After-tax value of immediate gain in old underwriting
	cost write-off			FORMULA
	a. PV of Outflows			FORMULA
	b. PV of Inflows			FORMULA
	c. Net present value			FORMULA
	d. Should the old issue be refunded with new debt?