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The Bowman Corporation has a bond obligation of $14 million outstanding, which it is considering refunding. Though the bonds were initially issued at 11 percent, the interest rates on similar issues have declined to 9.8 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 7 percent call premium on the old issue. The underwriting cost on the new $14,000,000 issue is $440,000, and the underwriting cost on the old issue was $330,000. The company is in a 35 percent tax bracket, and it will use an 12 percent discount rate to analyze the refunding decision. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. Calculate the present value of total outflows. (Do not round intermediate calculations and round your answer to 2 decimal places.)
b. Calculate the present value of total inflows. (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
d. Should the old issue be refunded with new debt?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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