Data collected existing bond new bond

Capital 936,000 936,000

Flotation cost 4,680 4,134

Maturity 10 8

Years since issue 3 0

Coupon 19.5% 11.7%

Call premium 15.6% -

After tax cost of new debt - 8.19%

Assume that the company pays no additional interest on the old issue and earns no interest on short-term investments.

Schedule of cash flows before tax after tax

Call premium on the old bond -146,016 -102,211

Flotation cost on the new issue -4134 -4134

Immediate tax savings on old flotation cost expense 3,276 983

Total after tax investment -105,362

1. For tax purposes, the flotation cost must be amoritized over the life of the new bond, which is 8 years. Thus, the after-tax savings every year for the next 8 years will be ______? (155.03, 217.04, 186.04, 140.40)

2. The company will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of ______? (140.4, 182.5, 155.03, 84.24)

3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue which is _________(14.63, 8.78, 11.7, 19.02) per year for the next ________(8, 10, 13, 3) years. If the company issues new bonds, the tax savings from amortizing the flotation costs will _______? (Increase, decrease).

4. The annual coupon payments on the old bonds were $182,520. Thus, the after-tax interest on the old issue is ______?(127,764.00, 166,093.20, 76,658.40, 102,211.20)

5. The after tax interest on the new bond is _____? (76,658.40, 68,992.56, 91,990.88, 107,321.76)

6. Thus the net annual interest savings after tax will be _____? (51,105.60, 61,326.72, 66,437.28, 56,216.16)

7. Present value of amortized tax effects _______? (83.47, 100.16, 175.29, 166.94)

8. Present value of interest savings ________? (466,527.41, 349,895.56, 291,579.63, 524,843.33)

Net investment outlay -$105,362

9. NPV from refunding ______? (223,561.32, -105,278.53, 292663.10, 186,301.10)