Data

fv
coupon rate
pmt
n
call prm

1800000
0
10%
1800000
10
9%

fv
coupon rate
pmt
n
tax rate

180

15

Outflows

After tax cost of call =18000000*.09*(1-.35)=1053000

Cost of new issue =530000
Amortize =530000/10 =53000
pv of amotizing tax saving =53000*(( 1-1.08^-10 )/ .08) =355634.31
equation 1
npv of cash outflow = 1053000-355634.31 = 697365.69
Inflows

Interest on old bonds =18000000 * 10% =1800000

Interest on new bonds = 18000000 * 8.5% =1530000
After tax Savings per year =( 1800000 1530000 ) *(1- .35)=175500
Pv of saving = 175500 *((1-1.08^-10) /.08)=1177619.29

equation 2

costs of old issue = 380000

amortized old issue cost =380000/20=19000
Unamortized old issue cost 19000*10 = 190000
Present value of deferred future write-off =19000 *((1-1.08^10)/.08)=127491.55
equation 3
Immediate gain in old underwriting cost write-off =190000 127491.55 =
62508.45
After-tax value of immediate gain in old underwriting
=62508.45*(1-.35)=40633.49
Total pv of cash inflow =117619.29+40633.49 = 1218249.78
aPV of Outflows
697365.69
bPV of Inflows
1218249.78
cNet present value =1218249.78 697365.69 =
positve
dShould the old issue be refunded with new debt

520884.09