The Bowman Corporation has a $18 million bond obligation outstanding, which it is considering refunding. Though the
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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 $18,000,000 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 aftertax 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?
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Bowman Corporation Outflows 1 Payment of call premium 18000000 9 1620000 1620000 1 35 1053000 2 Underwriting cost on new issue Amortization of costs 5...View the full answer
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Related Book For 
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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