# IFM7 Chapter 17 - Excel by rMQDu4g

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3                                                   Chapter 19. Ch 19-06 Build a Model
4                                            Note: Fill in the shaded cells with the appropriate formula
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6   Mullet Technologies is considering whether or not to refund a \$75 million, 12 percent coupon, 30 year bond issue that was sold
7   5 years ago. It is amortizing \$5 million of flotation costs on the 12 percent bonds over the issue's 30-year life. Mullet's
8   investment bankers have indicated that the company could sell a new 25-year issue at an interest rate of 10 percent in today's
9   market. Neither they nor Mullet's management anticipate that interest rates will fall below 10 percent any time soon, but
10   there is a chance that interest rates will increase.
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12   A call premium of 12 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to
13   \$5 million. Mullet's marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old
14   bonds are called, with the proceeds being invested in short-term government securities returning 6 percent annually during the
15   interim period.
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17   Current bond issue information
18   Par value                      \$        75,000,000
19   coupon rate                                   12%
20   original maturity                                30
21   remaining maturity                              25
22   original flotation costs       \$         5,000,000
23   Call premium                                  12%
24   Tax rate                                      40%
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27   New issue information
28   Coupon rate                              10.0000%
29   maturity                                        25
30   flotation costs                  \$       5,000,000
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32   Time between issues (months)                     1
33   rate on surplus funds (annual)                 6%
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35   a. Perform a complete bond refunding analysis. What is the bond refunding's NPV?
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37   Initial investment outlay to refund old issue:
38   Call premium on old issue =
39   After-tax call premium =
40   New flotation cost =
41   Old flotation costs already expensed =
42   Remaining flotation costs to expense =
43   Tax savings from old flotation costs =                                You get to expense the remaining flotation costs
44   Additional interest on old issue after tax =                          This is interest paid on the old bond issue between when the new b
45   Interest earned on investment in T-bonds after tax =                  This is interest earned on the proceeds from the new bonds before
46   Total investment outlay =
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48   Annual Flotation Cost Tax Effects:
49   Annual tax savings on new flotation =
50   Tax savings lost on old flotation =
51   Total amortization tax effects =
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53   Annual interest savings due to refunding:
54   Annual after tax interest on old bond =
55   Annual after tax interest on new bond =
56   Net after tax interest savings =
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58   Annual cash flows =
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60   NPV of refunding decision =
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62   c. At what interest rate on the new debt is the NPV of the refunding no longer positive?
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64   Use Goal Seek to set cell D60 to zero by changing cell C28.
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66                         "Break-even" interest rate =
H           I      J       K              L           M
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ar bond issue that was sold
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year life. Mullet's
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e of 10 percent in today's
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nt any time9soon, but
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w issue would amount to
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ed 1 month before the old
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ercent annually during the
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ning flotation costs
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d bond issue between when the new bonds are issued and the old bonds are retired
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proceeds from the new bonds before they are used to pay off the old bonds.
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