FI410 INTERMEDIATE FINANCIAL MANAGEMENT
Practice for Final Exam
Identify the choice that best completes the statement or answers the question.
____ 1. The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-
bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if the city
chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual
bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What
the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.
____ 2. Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of
annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a
$50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding
Ignore tax considerations--assume that the firm's tax rate is zero.
The company's decision of whether to call the bonds depends critically on the current interest rate on
issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the
The data below apply to the following problem(s).
New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year
bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds
over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of
11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation
costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds
be issued when the old bonds are called.
____ 3. Refer to Scenario 18-1. What is the required after-tax refunding investment outlay, i.e., the cash
outlay at the
time of the refunding?