SOLUTIONS CHAPTER 16

# SOLUTIONS CHAPTER 16 - CHAPTER 16 FIXED INCOME SECURITIES...

This preview shows pages 1–4. Sign up to view the full content.

CHAPTER 16 FIXED INCOME SECURITIES: BONDS AND PREFERRED STOCK 16-1 To solve this problem, use Table C at the end of this book and Equation (9-5) PV = FV x PVIF n,i \$108 = \$1,000 x PVIF 15,i ; PVIFF 15,i = \$108 ÷ \$1,000 = 0.108 If you look across the 15-year row, you will find the discount factor 0.108 under the 16 percent column. Thus, the yield of the bond to maturity is 16 percent. or by financial calculator: 15.99%. 16-2 (a) PV = \$1,000 x PVIFF 10,10% = \$1,000 x 0.386 = \$386, or by financial calculator: \$385.54 (b) PV = \$1,000 x PVIF 10,8% = \$1,000 x 0.463 = \$463, or by financial calculator: \$463.19 (c) PV = \$1,000 x PVIFF 10,12% = \$1,000 x 0.322 = \$322, or by financial calculator: \$321.97 16-3 (a) Net Cash Outflow = Gross Cash Outflow - Tax Savings (1) Gross Cash Outflow Call premium (\$50 x 1,500) \$ 75,000 Flotation cost of new bonds 22,000 Overlapping interest on old bonds (\$1,500,000 x 0.09 x 4/12) 45,000 Gross cash outlay \$142,000 (2) Tax Savings Overlapping interest on old bonds \$ 45,000 Call premium 75,000 Unamortized flotation cost of old bonds (\$18,000 x 25/30) 15,000 Unamortized discount on old bonds (\$45,000 x 25/30) 37,500 Total tax deductible expense \$172,500 x tax rate at 50% x 50% Tax savings \$ 86,250 (3) Net Cash Outflow = \$142,000 - \$86,250 = \$55,750

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
(b) Annual Interest Savings = Annual Net Cash Outflow on Old Bonds - Annual Net Cash Outflow on New Bonds. (1) Annual Net Cash Outflow on Old Bonds Interest expense (\$1,500,000 x 0.09) \$135,000 Less: Tax savings interest expense 135,000 amortization of flotation cost (\$18,000/30) 600 amortization of discount (\$45,000/30) 1,500 total tax deductible expense \$137,100 x tax rate at 50% x 50% tax savings \$ 68,550 Annual net cash outflow \$ 66,450 (2) Annual Net Cash Outflow on New Bonds Interest expense (\$1,500,000 x 0.07) \$105,000 Less: tax savings interest expense 105,000 amortization of flotation cost (\$22,000/25) 880 total tax deductible expense \$105,880 x tax rate x 50% tax savings \$ 52,940 Annual net cash outflow \$ 52,060 (3) Annual Interest Savings = \$66,450 - \$52,060 = \$14,390 (c) Present Value = \$14,390 x PVAIF 25,5% = \$14,390 x 14.094 = \$14,390 x 14.094 = \$202,813 (d) NPV = \$202,813 - \$55,750 = \$147,063 Because the net present value of the refunding decision is positive, the issue should be refunded.
(e) \$55,750 = \$14,390 x PVAIF 25,r PVAIF 25,r \$55,750 ÷ \$14,390 = 3.874 26% r-------------------- y ---------------- 25% . . 3.834 3.874 3.985 r = 25% + 0.74% = 25.74% or by financial calculator: 25.73% Because the internal rate of return for the refunding decision (25.74%) exceeds the firm's required rate of return (5%) after taxes), the issue should be refunded. 16-4 Increase in common stock \$100,000 Increase in preferred stock (\$100,000 x 0.5) 50,000 Net worth \$150,000 Increase in subordinated debt (\$150,000 x 0.6) 90,000 Net worth plus subordinated debt \$240,000 Increase in bonds (\$240,000 x 0.7) 168,000 Total increase \$408,000 16-5 A: \$50 x 50,000 x (1 - 0.4) = \$1,500,000 B: \$30 x 10,000 x (1 - 0.4) = \$180,000 C: \$100 x 25,000 x (1 - 0.4) = \$1,500,000 D: \$40 x 15,000 x (1 - 0.4) = \$360,000 16-6 Mortgage holders \$10 million 40% General creditors 14 million 56 Subordinated debenture 1 million 4 Total \$25 million 100% The \$5 million from the sale of mortgage assets goes to the mortgage holders, leaving \$5 million of their claims unsatisfied. Forty (40) percent of the \$9 million from the sale of other assets or \$3.6 million goes to the mortgage holders for a total recovery of \$8.6 million. Because the general creditors are entitled to receive \$7.84 million (\$14 million x 0.56), the remaining \$5.4(9 million - \$3.6 million) goes to the general creditors.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern