10. Refunding analysis Consider yourself the CFO of ToughNut Corp. Management is considering whether the company...
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10. Refunding analysis Consider yourself the CFO of ToughNut Corp. Management is considering whether the company should refund its $960,000, 20,00% coupon, 10-year bond issue that was sold at par 3 years ago. The flotation cost on this issue was $4,800 that has been amortizing on a straight-line bases over the 10- year original life of the issue. ToughNut Corp has a tax rate of 35%, and current short-term rates are 6%. You have collected the following data about the existing bond and the potential new bond issue: Data Collected Capital Flotation cost Maturity Years since issue Coupon Call premium After-tax cost of new debt Existing Bond $960,000 $4,800 10 3 20.00% 16.00% New Bond $960,000 $4,240 8 0 12.00% Financing: 10%, SOS and IBs & Lease Financing 7.80% The associate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and cams no interest on short term investments. Determine if the calculations that the financial analyst submitted are correct and match your analysis by selecting "Correct" or "Incorrect in the column on the right. (Note: Do not round intermediate calculations. Round final answers to the nearest whole dollar) Step 1: Determining the initial investment outlay Assignment #4 Part 1: Chapter 18 & 19 (40%) - Public and Private Financing: IOs, SOS and IBs & Lease Financing The associate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you. Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and earns no interest on short- term investments. Determine if the calculations that the financial analyst submitted are correct and match your analysis by selecting "Correct" or "Incorrect" in the column on the right. (Note: Do not round intermediate calculations. Round final answers to the nearest whole dollar.) Step 1: Determining the initial investment outlay Schedule of Cash Flows Investment Outlay Call premium on the old bond Flotation cost on new issue Immediate tax savings on old flotation cost expense Total after-tax investment Before Tax -$153,600 -$4,240 $3,360 After Taxi Check if Correct -$99,840 -$4,240 $1,176 -$102,904 Correct Correct Correct Correct Based on the information given to you, solve far step 2 (annual flotation cost tax effects) and step 3 (annual interest savings) by completing the following steps in the refunding analysis. Step 2: Calculating the annual flotation cost tax effects 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years. Thus, the after-tax saving every year for the next 8 years will be $185.50 2. ToughNut Corp., however, will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will per year for the CENGAGE MINDTAP ssignment #4 Part 1: Chapter 18 & 19 (40%) - Public and Private Financing: IOS, SOs and IBs & Lease Financing Based on the information given to you, solve for step 2 (annual flotation cost tax effects) and step 3 (annual interest savings) by completing the following steps in the refunding analysis. Step 2: Calculating the annual flotation cost tax effects 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years. Thus, the after-tax saving every year for the next 8 years will be $185.50 2. ToughNut Corp., however, will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will Step 3: Calculating the annual interest savings 1. The annual coupon payments on the old bonds were $192,000.00. Thus, the after-tax interest on the old issue is 2. The after-tax interest on the new bonds is 3. Thus, the net annual interest savings after tax will be SZAR Present value of amortized tax effects Present value of interest savings Net investment outlay At the final stage of the refunding analysis, you need to calculate the net present values (NPVS) of the savings and costs and the NPV of the entire refunding operation. (Round your answer to two decimal places.) Step 4: Calculating the NPV of the refunding Value -$102,904 per year for the O Public and Private Financing: IOS, SOs and IBs & Lease Financing 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years. Thus, the after-tax saving every year for the next 8 years will be $185.50 2. ToughNut Corp., however, will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will Step 3: Calculating the annual interest savings 1. The annual coupon payments on the old bonds were $192,000.00. Thus, the after-tax interest on the old issue is 2. The after-tax interest on the new bonds is 3. Thus, the net annual interest savings after tax will be At the final stage of the refunding analysis, you need to calculate the net present values (NPVS) of the savings and costs and the NPV of the entire refunding operation. (Round your answer to two decimal places.) Step 4: Calculating the NPV of the refunding Present value of amortized tax effects Present value of interest savings Net investment outlay NPV from refunding Value per year for the -$102,904 10. Refunding analysis Consider yourself the CFO of ToughNut Corp. Management is considering whether the company should refund its $960,000, 20,00% coupon, 10-year bond issue that was sold at par 3 years ago. The flotation cost on this issue was $4,800 that has been amortizing on a straight-line bases over the 10- year original life of the issue. ToughNut Corp has a tax rate of 35%, and current short-term rates are 6%. You have collected the following data about the existing bond and the potential new bond issue: Data Collected Capital Flotation cost Maturity Years since issue Coupon Call premium After-tax cost of new debt Existing Bond $960,000 $4,800 10 3 20.00% 16.00% New Bond $960,000 $4,240 8 0 12.00% Financing: 10%, SOS and IBs & Lease Financing 7.80% The associate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and cams no interest on short term investments. Determine if the calculations that the financial analyst submitted are correct and match your analysis by selecting "Correct" or "Incorrect in the column on the right. (Note: Do not round intermediate calculations. Round final answers to the nearest whole dollar) Step 1: Determining the initial investment outlay Assignment #4 Part 1: Chapter 18 & 19 (40%) - Public and Private Financing: IOs, SOS and IBs & Lease Financing The associate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you. Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and earns no interest on short- term investments. Determine if the calculations that the financial analyst submitted are correct and match your analysis by selecting "Correct" or "Incorrect" in the column on the right. (Note: Do not round intermediate calculations. Round final answers to the nearest whole dollar.) Step 1: Determining the initial investment outlay Schedule of Cash Flows Investment Outlay Call premium on the old bond Flotation cost on new issue Immediate tax savings on old flotation cost expense Total after-tax investment Before Tax -$153,600 -$4,240 $3,360 After Taxi Check if Correct -$99,840 -$4,240 $1,176 -$102,904 Correct Correct Correct Correct Based on the information given to you, solve far step 2 (annual flotation cost tax effects) and step 3 (annual interest savings) by completing the following steps in the refunding analysis. Step 2: Calculating the annual flotation cost tax effects 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years. Thus, the after-tax saving every year for the next 8 years will be $185.50 2. ToughNut Corp., however, will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will per year for the CENGAGE MINDTAP ssignment #4 Part 1: Chapter 18 & 19 (40%) - Public and Private Financing: IOS, SOs and IBs & Lease Financing Based on the information given to you, solve for step 2 (annual flotation cost tax effects) and step 3 (annual interest savings) by completing the following steps in the refunding analysis. Step 2: Calculating the annual flotation cost tax effects 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years. Thus, the after-tax saving every year for the next 8 years will be $185.50 2. ToughNut Corp., however, will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will Step 3: Calculating the annual interest savings 1. The annual coupon payments on the old bonds were $192,000.00. Thus, the after-tax interest on the old issue is 2. The after-tax interest on the new bonds is 3. Thus, the net annual interest savings after tax will be SZAR Present value of amortized tax effects Present value of interest savings Net investment outlay At the final stage of the refunding analysis, you need to calculate the net present values (NPVS) of the savings and costs and the NPV of the entire refunding operation. (Round your answer to two decimal places.) Step 4: Calculating the NPV of the refunding Value -$102,904 per year for the O Public and Private Financing: IOS, SOs and IBs & Lease Financing 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years. Thus, the after-tax saving every year for the next 8 years will be $185.50 2. ToughNut Corp., however, will no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will Step 3: Calculating the annual interest savings 1. The annual coupon payments on the old bonds were $192,000.00. Thus, the after-tax interest on the old issue is 2. The after-tax interest on the new bonds is 3. Thus, the net annual interest savings after tax will be At the final stage of the refunding analysis, you need to calculate the net present values (NPVS) of the savings and costs and the NPV of the entire refunding operation. (Round your answer to two decimal places.) Step 4: Calculating the NPV of the refunding Present value of amortized tax effects Present value of interest savings Net investment outlay NPV from refunding Value per year for the -$102,904
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