The Robinson Corporation has $42 million of bonds outstanding that were issued at a coupon rate of 12.450 percent seven years ago. Interest rates have fallen to 11.450 percent. Mr. Brooks, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 4.20 percent of the total bond value. The underwriting cost on the new issue will be 2.60 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 7 percent call premium starting in the sixth year and scheduled to decline by one- half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent (e.g. 4.06 percent should be rounded up to 5 percent). Cook Hint Print a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) Terences Discount rate Appendix D Present value of an annuity of $1, PV A PVA=A + Period 0 1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 22.023 25 808 32 835 39.196 2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.678 16.351 19.523 22.396 27.355 31.424 3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.877 17.413 19.600 23.115 25.730 4% .962 1.886 2775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 15.622 17.292 19.793 21.482 5% 0.952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 14.094 15.372 17.159 18.256 Percent 6% 7% 0.943 0.935 1.833 1.808 2.673 2.624 3.465 3.387 4212 4.100 4.917 4.767 5.582 5.389 6.210 5.971 6.802 6.515 7.360 7.024 7.887 7.499 8.384 7.943 8.853 8.358 9.295 8.745 9.712 9.108 10.106 9.447 10.477 9.763 10.828 10.059 11.158 10.336 11.470 10.594 12.783 11654 13.765 12.409 15.046 13.332 15.762 13.801 8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 10.675 11.258 11.925 12.233 9% 10% 11% 12% 0.917 0.909 0.901 0.893 1 .759 1.736 1.713 1.690 2.531 2.487 2.444 2.402 3.240 3.170 3.102 3.037 3.890 3.791 3.696 3.605 4.4864.355 4.231 4.111 5.033 4.868 4.712 4.564 5.535 5.335 5.146 4.968 5.995 5.759 5.537 5.328 6.418 6.145 5.889 5.650 6.805 6.495 6.207 5.938 7.161 6.814 6.492 6.492 6.194 7.487 7.103 6.750 6.424 7.786 7.367 6.982 6.628 8.061 7.606 7.1916.811 8.313 7.824 7.379 6.974 8.544 8.022 7.5497.120 8.756 8.201 7.702 7250 8.950 8.365 7.839 7366 9.129 8.514 7.963 7 459 9.8239.077 8.422 7.843 10.274 9.427 8.694 8.055 10.757 9.7798.951 8.244 10.962 9.915 9.042 304 Appendix D (concluded) Present value of an annuity of $1 Period 16% 0.862 1.605 2.246 2.798 3.274 3.685 4.039 13% 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7025 7.330 7.496 7.634 7.675 4.344 14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623 6.873 7.003 7.105 7.133 15% 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 6.464 6.566 6.642 6.661 17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628 5.766 5.829 5.871 5.880 Percent 19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.988 5.033 5.070 5.101 5.195 5.235 5.258 5.262 18% 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.467 5.517 5.548 5.554 25% 0.800 1.440 1.952 2.362 2.689 2.951 3.161 3.329 3.463 3.571 3.656 3.725 3.780 3.824 3.859 5.197 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870 4.948 4.979 4.997 4.999 30% 35% 40% 0.769 0.741 0.714 1.361 1.289 1.224 1.816 1.696 1.589 2.1661.997 1.849 2.436 2.220 2.035 2.643 2.385 2.168 2.802 2.508 2.263 2.925 2.598 2.331 3.019 2.665 2.379 3.092 2.715 2.414 3.147 2.752 2.438 3.190 2.779 2.456 3.223 2.799 2.469 3.249 2.814 2.478 3.268 2.825 2.484 3.283 2.834 2.489 3.295 2.840 2.492 3.304 2.844 2.494 3.311 2.848 2496 3.316 2.850 2497 3.329 2.856 2.499 3.332 2.857 2.500 3.333 2.857 2.500 3.333 2857 2500 50% 0.667 1.111 1.407 1.605 1.737 1.824 1.883 1.922 1.948 1.965 1.977 1.985 1.990 1993 1.995 1997 1.998 1.999 1999 1.999 5.342 3.887 5.468 5.575 5.668 5.749 5.818 5.877 5.929 6.097 6.177 6.233 6.246 3.910 3.928 3.942 3.954 3.985 3.995 3.999 4.000 2.000 2.000 2.000 a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) Discount rate b. Calculate the present value of total outflows. (Do not round intermediate calculations and round your answer to 2 decimal places.) PV of total outflows c. Calculate the present value of total inflows. (Do not round intermediate calculations and round your answer to 2 decimal places.) PV of total inflows d. 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.) Net present value The Robinson Corporation has $42 million of bonds outstanding that were issued at a coupon rate of 12.450 percent seven years ago. Interest rates have fallen to 11.450 percent. Mr. Brooks, the Vice-President of Finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 4.20 percent of the total bond value. The underwriting cost on the new issue will be 2.60 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 7 percent call premium starting in the sixth year and scheduled to decline by one- half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole percent (e.g. 4.06 percent should be rounded up to 5 percent). Cook Hint Print a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) Terences Discount rate Appendix D Present value of an annuity of $1, PV A PVA=A + Period 0 1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 22.023 25 808 32 835 39.196 2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.678 16.351 19.523 22.396 27.355 31.424 3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.877 17.413 19.600 23.115 25.730 4% .962 1.886 2775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 15.622 17.292 19.793 21.482 5% 0.952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 14.094 15.372 17.159 18.256 Percent 6% 7% 0.943 0.935 1.833 1.808 2.673 2.624 3.465 3.387 4212 4.100 4.917 4.767 5.582 5.389 6.210 5.971 6.802 6.515 7.360 7.024 7.887 7.499 8.384 7.943 8.853 8.358 9.295 8.745 9.712 9.108 10.106 9.447 10.477 9.763 10.828 10.059 11.158 10.336 11.470 10.594 12.783 11654 13.765 12.409 15.046 13.332 15.762 13.801 8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 10.675 11.258 11.925 12.233 9% 10% 11% 12% 0.917 0.909 0.901 0.893 1 .759 1.736 1.713 1.690 2.531 2.487 2.444 2.402 3.240 3.170 3.102 3.037 3.890 3.791 3.696 3.605 4.4864.355 4.231 4.111 5.033 4.868 4.712 4.564 5.535 5.335 5.146 4.968 5.995 5.759 5.537 5.328 6.418 6.145 5.889 5.650 6.805 6.495 6.207 5.938 7.161 6.814 6.492 6.492 6.194 7.487 7.103 6.750 6.424 7.786 7.367 6.982 6.628 8.061 7.606 7.1916.811 8.313 7.824 7.379 6.974 8.544 8.022 7.5497.120 8.756 8.201 7.702 7250 8.950 8.365 7.839 7366 9.129 8.514 7.963 7 459 9.8239.077 8.422 7.843 10.274 9.427 8.694 8.055 10.757 9.7798.951 8.244 10.962 9.915 9.042 304 Appendix D (concluded) Present value of an annuity of $1 Period 16% 0.862 1.605 2.246 2.798 3.274 3.685 4.039 13% 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7025 7.330 7.496 7.634 7.675 4.344 14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623 6.873 7.003 7.105 7.133 15% 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 6.464 6.566 6.642 6.661 17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628 5.766 5.829 5.871 5.880 Percent 19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.988 5.033 5.070 5.101 5.195 5.235 5.258 5.262 18% 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.467 5.517 5.548 5.554 25% 0.800 1.440 1.952 2.362 2.689 2.951 3.161 3.329 3.463 3.571 3.656 3.725 3.780 3.824 3.859 5.197 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870 4.948 4.979 4.997 4.999 30% 35% 40% 0.769 0.741 0.714 1.361 1.289 1.224 1.816 1.696 1.589 2.1661.997 1.849 2.436 2.220 2.035 2.643 2.385 2.168 2.802 2.508 2.263 2.925 2.598 2.331 3.019 2.665 2.379 3.092 2.715 2.414 3.147 2.752 2.438 3.190 2.779 2.456 3.223 2.799 2.469 3.249 2.814 2.478 3.268 2.825 2.484 3.283 2.834 2.489 3.295 2.840 2.492 3.304 2.844 2.494 3.311 2.848 2496 3.316 2.850 2497 3.329 2.856 2.499 3.332 2.857 2.500 3.333 2.857 2.500 3.333 2857 2500 50% 0.667 1.111 1.407 1.605 1.737 1.824 1.883 1.922 1.948 1.965 1.977 1.985 1.990 1993 1.995 1997 1.998 1.999 1999 1.999 5.342 3.887 5.468 5.575 5.668 5.749 5.818 5.877 5.929 6.097 6.177 6.233 6.246 3.910 3.928 3.942 3.954 3.985 3.995 3.999 4.000 2.000 2.000 2.000 a. Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.) Discount rate b. Calculate the present value of total outflows. (Do not round intermediate calculations and round your answer to 2 decimal places.) PV of total outflows c. Calculate the present value of total inflows. (Do not round intermediate calculations and round your answer to 2 decimal places.) PV of total inflows d. 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.) Net present value