Posted: March 7th, 2014
The Bowman Corporation has a $25 million bond obligation outstanding, which it is considering …
| The Bowman Corporation has a $25 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 7 percent, the interest rates on similar issues have declined to 5.5 percent. The bonds were originally issued for 25 years and have 20 years remaining. The new issue would be for 20 years. There is an 9 percent call premium on the old issue. The underwriting cost on the new $25,000,000 issue is $600,000, and the underwriting cost on the old issue was $450,000. The company is in a 35 percent tax bracket, and it will use a 7 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision. Use Appendix D. |
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| (a) | Calculate the present value of total outflows. (Round “PV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Omit the “$” sign in your response.) |
| Total outflows | $ |
| (b) | Calculate the present value of total inflows.(Round “PV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Omit the “$” sign in your response.) |
| Total inflows | $ |
| (c) | Calculate the net present value. (Round “PV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.Omit the “$” sign in your response.) |
| Net present value |
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