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Bond Call and NPV Calculation Analysis

The document outlines a financial analysis involving the cost of calling an old bond and the net cost of borrowing for a new issue. It calculates the present value of tax savings and cost savings associated with the bond, ultimately determining a positive net present value of 213,399.40, indicating a favorable financial decision. The analysis includes various calculations related to premiums, underwriting costs, and after-tax savings.

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Tobi Omole
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12 views1 page

Bond Call and NPV Calculation Analysis

The document outlines a financial analysis involving the cost of calling an old bond and the net cost of borrowing for a new issue. It calculates the present value of tax savings and cost savings associated with the bond, ultimately determining a positive net present value of 213,399.40, indicating a favorable financial decision. The analysis includes various calculations related to premiums, underwriting costs, and after-tax savings.

Uploaded by

Tobi Omole
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Assignment 2

Call premium = 10,000,000 * 8% = 800,000


Cost of calling old bond = 10,000,000 + 800,000 = 10,800,000

Borrowing expense on new issue

Underwriting cost per year = 400,000/5 = $80,000


Tax saving each year = 800,000 * 40% = 32,000

Calculation for PV
N= 5, PMT = 32,000, FV= 0, I/Y = 9%

PV= 124,468.84

Net cost of borrowing = 400,000 – (124, 468.84) = 275,531.16

Step B

Cost savings:

12% * 10,000,000 * (1-o.40) = 720,000


9% * 10,000,000 * (1-0.40) = 540,000

After tax savings = 720,000 – 540,000 = 180,000

Calculation for PV
PMT = 180,000, I/Y = 9, N = 12, FV = 0

PV = 1,288,930.55

Step C

Net present Value

800,000 + 275,531.16 = 1,075,531.16 (outlflows)

Inflow = 1,288930.55

Net present value = 213,399.40

Refund because the NPV is positive

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