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Chapter 13 AFTER-TAX COST OF CALLING BOND ISSUE |Total call premium per bond |x x x | |Less: (1 – Tax rate) per bond |(xx) | |After-tax cost of calling bond issue |xxx | A13-2. After-tax cost of calling bond issue = Total call premium ( (1 – Tax rate) | |Call Premium |Total Call |After-Tax Cost | |Bond |per Bond |Premium |of Calling Issue | |A |$50 |$ 600,000 |$ 360,000 | |B |30 |600,000…show more content…
Find the net present value of refunding decision. A13-5. Steps in bond refunding decision: (1) Calculate the initial investment required to call the old bond issue and float the new one; (2) Find the annual cash flow savings from the new versus old bond issue; and, (3) Find the net present value of refunding decision. Answers to parts (a)-(f) of this problem will be determined with this procedure. (1) Finding the Initial Investment for the Bond Refunding Decision (a) Call premium before tax [($1,090 – $1,000) ( 50,000 bonds] $4,500,000 Less: Taxes (0.40 ( $4,200,000) (1,800,000) After-tax cost of call premium $2,700,000 (b) Floatation cost of new bond (500,000) (c) Overlapping interest on old bond (none) 0 (d) Tax savings from unamortized discount on old bond (The old bonds were issued at par, so no unamortized discount) 0 (e) Tax savings from unamortized floatation of old bond (15 ÷ 20 ( $350,000 ( 0.40) (105,000) Initial investment $2,095,000 (2) Finding the Annual Cash Flow Savings for the Bond Refunding Decision Old bond (a) Interest cost Before tax (0.09 ( $50,000,000) $4,500,000 Less: Taxes (0.40 ( $4,500,000) (1,800,000) After-tax interest cost $2,700,000 (b) Tax savings from amortization of discount
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