a)
To determine: The total dollar call premium required to call the old issue, whether it is tax deductible and the net after-tax cost of the call.
a)
Explanation of Solution
The overall premium is
b)
To determine: The dollar floatation cost and whether it is immediately tax deductible and post-tax flotation cost.
b)
Explanation of Solution
On the new issue the currency flotation rate is
c)
To determine: The amounts of old issue floatation cost and not been expensed and whether these deferred costs be expensed immediately if the old issue is refunded and the value of tax savings.
c)
Explanation of Solution
On the old issue the flotation costs were
d)
To determine: The net post-tax cash outlay needed to refund the old issue.
d)
Explanation of Solution
e)
To determine: The semiannual tax savings that arises from amortizing the floatation cost and the foregone semiannual tax savings on the old-issue floatation cost.
e)
Explanation of Solution
The $1,600,000 cost of new issue flotation would be depreciated over the issue's 20-year existence. Therefore, it would cost
f)
To determine: The semiannually post-tax interest savings that would result from the refunding.
f)
Explanation of Solution
The interest on the old issue is
g)
To determine: The sum of these two semiannual cash flows and appropriate discount rate to apply to these two semiannual cash flows and the present value.
g)
Explanation of Solution
The estimated amortization tax benefits over 20 years are about $3,200 per year, while the net interest costs over 20 years are about $360,000 per year. The net semi-annual cash balance, as shown below, is thus $356,800.
The cash flows are predicated on treaty obligations and therefore have about the same level of risk as to the debt of the company. In fact, the cash flows are already tax-net. Consequently, the suitable interest rate is the after-tax cost of debt to GST.(The citation of the cash to fund the net investment expenditure also affects the discount rate, but most companies use debt to finance that expenditure, and in this case, the discount rate should be the after-tax debt cost.)Finally, as we are valuing future flows, the correct debt cost is the cost of today, or the cost of the new issue, and not the debt cost that floated five years ago. The appropriate rate of discount is thus 0.6(8 percent) = 4.8 percent per annum, or 2.4 percent per semi-annual period.
h)
To determine: The
h)
Explanation of Solution
The redemption of bonds would entail a net cash outlay of $3,472,000, but on a present-value basis it would yield $9,109,413 in net savings. The refunding NPV is thus $5,637,413:
The choice to repay instead of wait until later is much harder than finding the refunding NPV now. If interest rates were expected to fall, and therefore GST could issue debt below today's 8 percent rate in the future, then it might pay to wait. Interest rate motions, however, are very difficult to predict, if not impossible, and thus most
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Chapter 18 Solutions
INTERMEDIATE FINANCIAL MANAGEMENT
- Bond Valuation and Interest Rate Risk The Garraty Company has two bond issues outstanding. Both bonds pay 100 annual interest plus 1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. a. What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on Bond S. b. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?arrow_forwardCHALLENGE PROBLEM This problem challenges you to apply your cumulative accounting knowledge to move a step beyond the material in the chapter. On April 1, 20-1, Rebound Co. issued 300,000 of 10%, 10-year bonds, callable at 105 after three years, at face value. On April 1, 20-4, after completing three years of interest payments on the bonds, Rebound is considering calling the bonds and issuing 300,000 of new 8%, 10-year bonds at face value. The current market interest rate is only 8%, so Rebound thinks it might save money by taking this action. REQUIRED 1. Compute the net savings to Rebound over the life of the original bond issue if it calls the old bonds and issues the new bonds. 2. Assuming Rebound calls the original bond issue, prepare the journal entry for the bond redemption.arrow_forwardPresent value of bonds payable; discount Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder issued $30,000,000 of four-year, 9% bonds, with interest payable semiannually, at a market (effective) interest rate of 10%. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the question below. Open spreadsheet Determine the present value of the bonds payable. Round your answer to the nearest dollar. 22,729,071x Feedback Y Check My Work Remember, the selling price of a bond is the sum of the present values of: the face amount of the bonds due at the maturity date and the periodic interest to be paid on the bonds. The market rate of interest is used to compute the present value of both the face amount and the periodic interest.arrow_forward
- Bond Valuation and Interest Rate Risk The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. What will be the value of each of these bonds when the going rate of interest is 4%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent. Bond L: $ Bond S: $ What will be the value of each of these bonds when the going rate of interest is 10%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent. Bond L: $ Bond S: $ What will be the value of each of these bonds when the going rate of interest is 13%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent.…arrow_forwardPresent value of bonds payable; discount Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder issued $25,000,000 of three-year, 7% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the question below. Open spreadsheet Determine the present value of the bonds payable. Round your answer to the nearest dollar. $arrow_forwardCost of debt Kenny Enterprises has just issued a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 8.8% with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following prices? What do you notice about the price and the cost of debt? a $914.64 b. $1,000.00 c. $1,024.73 d. $1,149.55arrow_forward
- Present value of bonds payable; discount Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder issued $27,000,000 of three-year, 9% bonds, with interest payable semiannually, at a market (effective) interest rate of 11%. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the question below. X Open spreadsheet Determine the present value of the bonds payable. Round your answer to the nearest dollar. $arrow_forwardCurrent Attempt in Progress Coronado Industries is about to issue $288,000 of 10-year bonds paying an 9% interest rate, with interest payable annually. The discount rate for such securities is 10%. Click here to view the factor table 1. Table 2 Table 3 Table 4 How much can Coronado expect to receive from the sale of these bonds? (For calculation purposes, use 5 decimal places as displayed in th factor table provided, e.g. 5.25471. Round answer to O decimal places, e.g. 2,525.)arrow_forwardDIRECTIONS: Read and analyze the following problems and supply what is required and support it with necessary computations. 1. A company plans to issue a 25-year bond with a 12.5% interest rate, issued at a face value of P1, 000. The company is subject a 30% tax rate and expects a return on investment at 8%. Compute for the cost of debt issuance.arrow_forward
- Present Value of Bonds Payable; Discount Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder Co. issued $25,000,000 of five-year, 7% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable, using the present value tables in Exhibit 8 and Exhibit 10. Round to the nearest dollar. Check My Work 3 more Check My Work uses remaining. ( Previous Next 11:18 %24arrow_forwardCost of debt. Kenny Enterprises has just issued a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 10.7% with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following prices? What do you notice about the price and the cost of debt? a. $967.34 b. $1,000.00 c. $1,045.83 d. $1, 189.10% (Round to two decimal places.)arrow_forwardDetermining Bond Premium or Discount Los Altos, Inc., decides to sell $1,000,000 in bonds to finance the construction of a new warehouse. The bonds will carry an annual coupon rate of inter- est of four percent, to be paid semiannually, and will mature in five years. (a) If the market rate of interest at the time of issuance is five percent, wili the bonds sell at their face value, a discount, or a premium? (b) If the market rate of interest at the time of issuance is four percent, will the bonds sell at their face value, a discount, or a premium? (c) If the market rate of interest at the time of issuance is three percent, will the bonds sell at their face value, a discount, or a premium? LO2 SE9-2. MBCarrow_forward
- College Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning