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Problem 3
Business Value $ 800,000
Total Current Shares 40000
Price/Share $ 20.00
Investment of 200000 @ $20/share
Angel Investment $ 200,000
Shares Sold to Investor 10,000
Problem 7
Input Data
Existing bond issue $ 75,000,000
Original Floatation cost $ 5,000,000
Maturity of original debt 30
Years since old debt issue 5
Call premium (%) 12%
Original coupon rate 12%
After-tax cost of new debt
Before-Tax
Annual Cash Flows $ 1,533,333
After Tax Interest Rate
NPV of Refund
Problem 7
Mullet Technologies is considering whether or not to refund a $75
million, 12% coupon, 30-year bond issue that was sold 5 years ago. It is
New bond issue $ 75,000,000 amortizing $5 million of floatation costs on the 12% bonds over the
issue's 30-year life. Mullet's investment banks have indicated that the
New floatation cost $ 5,000,000 company could sell a new 25-year issue at an interest rate of 10% in
New bond maturity 25 today's market. Neither they nor mullet's management anticipated that
interest rates will fall below 10% any time soon, but there is a chance
New cost of debt 10% that rates will increase.
A call premium of 12% would be required to retire the old bonds, and
Tax rate 40% flotation costs on the new issue would amount to $5 million. Mullet's
Short-term interest rate 6% marginal federal-plus-state tax rate is 40%. The new bonds would be
issued 1 month before the old bonds are called, with the proceeds being
invested in short-term government securities returning 6% annually
After-Tax during the interim period.
$ (5,400,000) Conduct a complete bond refunding analysis. What is the bond
(5,000,000.00) refunding's NPV?
1,666,666.67
(450,000.00)
225,000.00
$ (8,958,333)
After-Tax
$ 80,000
(66,666.67)
$ 13,333
After-Tax
$ 5,400,000
(4,500,000.00)
$ 900,000
After-Tax
$ 913,333
0.06
$2,717,131.96
to refund a $75
sold 5 years ago. It is
% bonds over the
ve indicated that the
est rate of 10% in
ment anticipated that
ut there is a chance
at is the bond
Chapter 19
Problem 4
Problem Variables
NAL=PV Cost of Owning - PV Cost of Leasing
Tax Rate 40%
Loan Interest Rate 15%
Install Costs 1,500,000
Loan Value 1,500,000
After-tax Interest Rate(Loan) 9%
Residual Value 250,000
Lease Payments (400,000)
Payment ($463,002.99)
PV Cost of Owning: 1 2
After-Tax Loan Payments ($463,002.99) ($463,002.99)
Deprec. Tax Savings 199,980 266,700
Residual Value
Tax on Residual Value
Net Cash Flow $ (263,021.99) $ (196,300.99)
($241,304.58) ($165,222.62)
PV Cost of Owning: ($885,671.71)
PV Cost of Leasing: 1 2
Lease Payment (400,000) (400,000)
Tax Savings 160,000 160,000
Net Cash Flow (240,000) (240,000)
($220,183.49) ($202,003.20)
PV Cost of Owning: ($777,532.77)
3 4
($463,002.99) ($463,002.99)
88,860 44,460
250,000
(100,000)
$ (374,139.99) $ (268,538.99)
($288,904.72) ($190,239.79)
3 4
(400,000) (400,000)
160,000 160,000
(240,000) (240,000)
($185,324.04) ($170,022.05)
Chapter 19 Home Work - Handout Problem 6
Lease
Carmichael Cleaners needs
3 year lease -29000 Beginning machine that costs $100,0
Lease Includes Maintenance evaluating whether it shou
machine. The equipment f
year class, and it would be
Tax 20% then sold, because the firm
facility at that time. The es
Purchase equipment after 3 years is
contract the equipment wo
3 year loan payable at the beginning o
Interest paid at EOY the Firm could lease the eq
Before-Tax Cost 10% lease payment of $29000 p
beginning of each year. The
Repaid A EO3Y -100000 End maintenance. The firm is in
Yearly Maintenance -3000 Beginning and it could obtain a 3-yea
interest payable at the end
the equipment at a before
$100,000 should be repaid
Year 0 1 2 3 year. If there is a positive N
the firm will lease the equi
Lease buy it. What is the NAL? (
Cash Out Flow -29000 -29000 -29000 rate for Year 1 to 4 are 0.33
Tax Savings 5800 5800 5800 0741.)
Net Cash Flow -23200 -23200 -23200
-23200 -21481.5 -19890.3
PV of Cost of Lease -64571.7
Purchase
Maintenance -3000 -3000 -3000
Loan Interest -10000 -10000 -10000
Repayment -100000
Tax Interest Savings 2000 2000 2000
Deprec Tax Savings 6666 8890 2962
Maint. Tax Savings 600 600 600
Residual Value 24000
Net Cash Flow -2400 -3734 -1510 -81038
-2400 -3457.41 -1294.58 -64330.6
PV of Cost Purchase -71482.6