Calculate the annual tax savings from the flotation cost

Assignment Help Finance Basics

Reference no: EM132078694

Qusetion: Schooner Company is contemplating offering a new $50 million bond issue to replace an outstanding $50 million bond issue. The firm wishes to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described in what follows. The firm is in the 25% tax bracket. Old bonds. The outstanding bonds have a $1,000 par value and a 8% coupon interest rate. They were issued 5 years ago with a 20-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $400,000 in flotation costs. They are callable at $1,080. New bonds. The new bonds would have a $1,000 par value, a 6% coupon interest rate, and a 15-year maturity. They could be sold at their par value. The flotation cost of the new bonds would be $500,000. The firm does not expect to have any overlapping interest.

A. Calculate the tax savings that are expected from the unamortized portion or the old bonds' flotation cost. Round your answer to the nearest whole dollar. $

B. Calculate the annual tax savings from the flotation cost of the new bonds, assuming the 15-year amortization. Round your answer to the nearest whole dollar. $

C. Calculate the after-tax cost of the call premium that is required to retire the old bonds. Round your answer to the nearest whole dollar. $

D. Determine the initial investment that is required to call the old bonds and issue the new bonds. Round your answer to the nearest whole dollar. $

E. Calculate the annual cash flow savings, if any, that are expected from the proposed bond refunding decision. Round your answer to the nearest whole dollar. $

F. If the firm has a 4.5% after-tax cost of debt, find the net present value of the bond refunding decision. Round your answer to the nearest whole dollar. $

G. Would you recommend the proposed refunding?

Reference no: EM132078694

Questions Cloud

Describe the problem your innovation targets : How does the innovation contribute to the organization’s competitive advantage? Describe the problem your innovation targets.

Examine the purpose statement : In this section, we will examine the purpose statement, which is one of the sections in the first chapter of the dissertation or capstone.

Distinguishing between variable and fixed costs : The Lee's have provided you with the following costs and relevant information that are assumed for year 20XY. Classify the costs as variable costs or fixed.

What is the role of civil society in promoting democracy : What is the role of civil society in promoting democracy?

Calculate the annual tax savings from the flotation cost : Schooner Company is contemplating offering a new $50 million bond issue to replace an outstanding $50 million bond issue. The firm wishes to take advantage.

Ideas are introduced in services-products or processes : When new ideas are introduced in services, products or processes, they rarely have an impact that increases uniformly over time.

Review problem of schweser satellites inc : Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2.5 million.

Statements is true of transformational leaders : Which of the following statements is true of transformational leaders? Unlike leaders, managers are those who:

Sales ordering and product manufacturing system : Company's employees who will be using a newly introduced sales ordering and product manufacturing system.

User Account

All Pages