Refunding Analysis Existing bond issue $ $100,000,000$ Coupon rate on existing bond issue Original maturity $($in years$)$ of existing bond issue Years since existing bond issue sold Original flotation cost on existing bond issue Call premium $(\%)$ on existing bond issue New bond issue $ $100,000,000$ Coupon rate on new bond issue Maturity $($in years$)$ of new bond issue Flotation cost on new bond issue $ $5,000,000$ Tax rate $30\%$ Interest rate on short$-$term government securities Number of months new bonds issued before old bonds called $1$ Investment Outlay $($After Taxes$)$: Call premium on old bond issue Flotation cost on new bond issue Tax savings on old bond issue flotation cost expense Additional interest on old bond issue Interest earned on short$-$term government securities Total after$-$tax investment $[$ Formulas; $ $6,300,000=$B $3^*$ B $8^*(1-$B $15)$

$ $5,000,000=$B $13$

$-$$ $750,000=-$B $7^*($B $5-$B $6)/$ B $5^*$ B $15$

$ $3,888,889=($B $3^*$ B $4/12)^*(1/$ B $15)$

$-$$ $408,333=-$B $10^*$ B $16/12^*(1-$B $15)$

$ $14,030,556=$S U M$($B $20$: B $24)]$ Annual Flotation Cost Tax Effects: Annual tax savings on new issue flotation costs Annual lost tax savings from old issue flotation costs Net flotation cost tax savings $ $60,000=$B $13^*$B $15/$ B $12$

$ $30,000=$B $7/$ B $5^*$B $15$$$ $30,000=$B $28-$B $29$ Annual Interest Savings Due to Refunding: Annual interest on old bond issue Annual interest on new bond issue Net interest savings Annual cash flows $($flotation cost and interest savings$)$ NPV of bond refunding decision

$ $9,800,000=$B $3^*$ B $4^*(1-$B $15)$

$ $6,300,000=$B $10^*$ B $11^*(1-$B $15)$

$=$B $33-$B $34$

$ $3,530,000=$B $30+$B $35$

$ $29,836,459=$P V$($B $11^*(1-$B $15),$ B $12,-$B $37,0)-$B $25$