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Finance Homework--Must Show Work in Excel DUE BY 11PM EST TONIGHT

Problem 17


The Bowman Corporation has a $20 million bond obligation outstanding, which it is considering refunding.

Though the bonds were initially issued at 12 percent, the interest rates on similar issues have declined
to 10.5 percent. The bonds were originally issued for 20 years and have 15 years remaining. The new issue
would be for 15 years. There is an 8 percent call premium on the old issue. The underwriting cost on the 
new $20 million issue is $570,000, and the underwriting cost on the old issue was $400,000. The company is 
in a 35 percent tax bracket, and it will use a 7 percent discount rate (rounded after-tax cost of debt) 
to analyze the refunding decision.         

Should the old issue be refunded with new debt?


Problem 20 B


Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement.If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12%. The firm will use the three year MACRS depreciation category(with the associated 4-year write off). Assume a tax rate of 35%

a. Compute the aftertax cost of the lease for 4 years.

b. Compute the annual payment for the loan.

c.Compute the amortization schedule for the loan.

d. Determine the depreciation schedule.

e. Compute the after tax cost of borrow-purchase alternative.

f.Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8%

g.Which alternative should be selected, based on miimizing the present value of aftertax costs?







1. Which of the following is not a potential benefit of a merger? (Points : 5)

       Improved Financing Posture

       Portfolio Effect

       Dilution of Earnings Per Share

       Tax Loss Carryforward


2. The Haavelmo Widget Corporation has just signed a 60-month lease on an asset with a 6-year life. The lessor will retain the property at the end of the lease, and the present value of the minimum lease payments is $470,000. The estimated fair value of the property is $600,000. Is this an operating lease? (Points : 5)



       if the company elects to treat the lease as an operating lease

       more information is required


3. An example of a horizontal merger would be: (Points : 5)

       Pepsi and Sears.

       McDonalds and Pillsbury.

       Pepsi and Frito Lay.

       Coca Cola and Dr. Pepper.


4. Which of the following are advantages of leasing? (Points : 5)

       A lease obligation may be substantially less restrictive than the provisions of a bond indenture.

       There may be no down payment as in a purchase.

       The negative effects of obsolescence may be eliminated.

       All of these.


5. A serial bond repayment plan involves a: (Points : 5)

       lump-sum payment at maturity.

       conversion of debt to common stock.

       an early redemption of all debt.

       series of installments to retire the debt over the life of the issue.


6. An indenture is: (Points : 5)

       the section of a corporation's bylaws pertaining to bond issues.

       the summary of the essential features of a stock issue.

       the contract between a corporation and a trustee acting for bondholders.

       the underwriting contract.


7. A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a: (Points : 5)


       holding company.




8. An operating lease: (Points : 5)

       has a lease term equal to 75% or more of the estimated property.

       is usually short-term and is often cancelable at the option of the lessee.

       must show up on the balance sheet.

       none of these.


9. Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium? (Points : 5)






10. Which of the following types of mergers is most likely to lead to diversification benefits? (Points : 5)

       Horizontal merger

       Vertical merger

       Tax free exchange



11. Which of the following is not a form of compensation that selling stockholders could receive? (Points : 5)



       Stock Options

       Fixed Income Securities


12. The "call" provision on some bonds allows: (Points : 5)

       the bondholder to redeem the bond earlier than maturity, but usually involves a call premium.

       the corporation to request additional capital contributions from the bondholder.

       the corporation to redeem the bonds earlier than maturity but usually for a premium over the par value.

       the bondholder to convert the bond into preferred stock.


13. The higher the tax rate, the ______ the net underwriting cost on the new bond issue. (Points : 5)



       higher or lower

       substantially higher


14. Which one of these conditions must be met for a lease to qualify as a capital lease? (Points : 5)

       The lease contains a bargain purchase price at the end of the lease.

       The lease must have a value of at least $10 million.

       The lease must have a life of 10 years.

       All of these.


15. Which of the following bonds offers the most security to the bondholder? (Points : 5)

       Junior mortgage bonds

       Senior mortgage bonds

       Debenture bond

       Income bond


16. A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains all but which of the following characteristics? (Points : 5)

       Most bonds must be outstanding at least 5 years before being called.

       After the call date, the call premium tends to decline over time.

       The provision typically calls for debt conversion into common stock.

       The corporation will pay a premium over par for the bonds.


17. The rising ratio of divestitures to new acquisitions which occurred in the past suggests that: (Points : 5)

       poison pills are no longer effective as a defense against takeovers.

       too much diversification strained the operating capabilities of many firms.

       the portfolio effect has been a highly successful method of reducing risk.

       multinational firms are increasingly considered highly risky investments.


18. Bond refunding occurs when: (Points : 5)

       interest rates in the market are sufficiently less than the coupon rate on the old bond.

       interest rates in the market have risen over the coupon rates on the old bond.

       the price of the old bond is less than par.

       the sinking fund has accumulated enough money to retire the bond issue.


19. The main cause for the increase in corporate debt in America is: (Points : 5)

       rapid business expansion.

       inflationary impacts.

       inadequate internally-raised funds.

       All of these.


20. Floating rate bonds are most likely to be popular with investors when it is anticipated that: (Points : 5)

       interest rates will stay the same.

       interest rates will go up.

       interest rates will go down.

       short-term interest rates will be higher than long-term interest rates.

Submitted by geniusy_2006 on Sun, 2013-04-28 20:45
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Here is Bowman solution

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Here is Bowman solution

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Advanced Refunding decision xxxxx xxx xxxxxx xxxxxxxxxxx xxx x xxx million xxxx xxxxxxxxxx outstanding, which it xx xxxxxxxxxxx xxxxxxxxxx Though the xxxxx were initially xxxxxx at 12 xxxxxxxx xxx xxxxxxxx rates on xxxxxxx issues xxxx xxxxxxxx to xxxx percent. xxx bonds xxxx originally issued xxx xx years xxx have xx years remaining. The new xxxxx would xx for xx years. xxxxx xx an x percent call premium on xxx xxx xxxxxx The underwriting cost on xxx xxx xxxxxxxxxxx xxxxx xx xxxxxxxxx xxx the underwriting xxxx on the old issue xxx xxxxxxxxx xxx xxxxxxx is in a xx xxxxxxx tax xxxxxxxx and it xxxx use a 7 percent xxxxxxxx rate xxxxxxxx xxxxxxxxx xxxx of xxxxx xx analyze the refunding decision.

Should the old issue xx refunded with xxx debt?


Bowman xxxxxxxxxxx


1. Payment xx call premium

$20,000,000 × 8% = $1,600,000

xxxxxxxxxx (1 – xxxx = $1,040,000

xxxxxxxxxxxxxxx cost on xxx xxxxx

Amortization xx xxxxx ($570,000/15) xxxxx

$38,000 x (.35) = $13,300 tax savings per xxxx

xxxxxx xxxxxxxxxxxxxxxxxxxx

PV xx future tax xxxxxxx $13,300 × xxxxxxx xxxxxxx

Net xxxx of underwriting xxxxxxx on new xxxxxxxxxxxxxx

xxxxxx for n = 15, i x xx (Appendix D)


xxxxxxx savings in lower interest xxxxx

12% xxxxxxxxx xx old bond) × xxxxxxxxxxx = x 2,400,000/year

xxxxx (interest on new bond) × $20,000,000 = xxxxxxxxxxxxxx

xxxxxxx xxx year before taxes = x xxxxxxx

xxxxxxxx Savings xxxxxxxx × xx – .35) = x 195,000 xxx yr.

x 195,000


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file2.xls preview (326 words)

Problem xxxxx

Foundations xx xxxxxxxxx xxxxxxxxxx
xxxxxx Hirt and xxxxxxxxx x xxxxxxxxxx Edition
xxxxxxx 16-17
xxxxxxxxxx Refunding xxxxxxxx
xxxxxxx xxxxx
Course xxxxx
Student ID:
xxxxxx Number:
The xxxxxx Corporation xxx x xxx million bond obligation xxxxxxxxxxxx xxxxx it xx xxxxxxxxxxx xxxxxxxxxx
xxxxxx xxx bonds xxxx xxxxxxxxx issued at xx xxxxxxxx xxx interest rates xx similar issues xxxx declined
to 10.5 percent. xxx bonds xxxx xxxxxxxxxx issued for xx xxxxx xxx have xx years xxxxxxxxxx The new xxxxx
would xx for 15 xxxxxx xxxxx xx an x xxxxxxx xxxx premium xx the old issue. xxx xxxxxxxxxxxx xxxx xx xxx
xxx xxx xxxxxxx issue is xxxxxxxxx and the underwriting cost xx the xxx xxxxx was $400,000. xxx xxxxxxx is
in x xx percent tax xxxxxxxx and xx xxxx xxx x 7 xxxxxxx discount rate (rounded xxxxxxxxx xxxx xx debt)
to xxxxxxx xxx refunding decision.
Should the old issue xx xxxxxxxx with new debt?
Problem xxxxx
Use formulas and functions xx complete the xxxxxxxxxxxx of this xxxxxxxx
Bond obligation$20,000,000
Interest xxxx xx bonds xxx
Interest rate xx new bonds xxxxx
Call premium8%
xxx xxxxxxx
Underwriting xxxxx xx new issue$570,000
Underwriting costs of xxx issue$400,000
Years xxxxxxxxx on bonds * 15
Discount rate7%
1 xxxxx xxx xxxx xx xxxxFORMULA

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