BU393 Question Bank Q13 Rev Solution

BU393 Question Bank Q13 Rev Solution - (300K)...

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After-tax discount rate: 11%(1–0.35) = 7.15% Interest/year on existing bond: (10M)(13%) = 1,300,000 Interest/year on new bond: (10M)(11%) = 1,100,000 Savings/year (before tax): 200,000 PV of after-tax savings: (200K)(1–.35)(PVIFA 7.15%,20 ) = 1,361,311 B Call Premium: (10M)(15%) = 1,500,000 C New Flotation Costs:
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Unformatted text preview: (300K) (300K/5)(35%)(PVIFA 7.15%,5 ) = 214,240 C Overlap Interest: (10M)(13%)(1.35)(3/52) = 48,750 C Offsetting Interest Earned: (10M)(4%)(1.35)(3/52) = 15,000 B NPV = 386,679 C Since the Costs exceed the benefits (by $387,000), do not refund the bonds at this time....
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