Chapter 16: Long-Term Debt and Lease Financing
c.
Original amount $900,000
Chapter 16: Long-Term Debt and Lease Financing
CP 16-1. Solution:
a.
Broadband, Inc.
Price of Old Bond
Present Value of Interest Payments Appendix D
PVA = A ×PVIFA (n = 10, i = 6%)
PVA = $90 × 7.360 = $662.40
Present Value of Principal Payment at Maturity
PV = FV x PVIF (n = 10, i = 6%) Appendix D
PV = $1,000 x .558 = $558
Total present value
Present Value of Interest Payments $ 662.40
Present Value of Principal Payment 558.00
$1,220.40
CP16-1. (Continued)
b. The price of $1,220.40 is more than 20 percent over par. The
c. Refunding Decision
Outflows
1.
Payment of call premium
$30,000,000 × 8% = $2,400,000
$2,400,000 x (1 – .30) = $1,680,000
Chapter 16: Long-Term Debt and Lease Financing
16-33
2.
Underwriting cost on new issue
Actual expenditure $30,000,000 × 5%
$1,500,000
Amortization of cost = ($1,500,000/10)
$ 150,000
Tax savings per year 150,000 × .30
$ 45,000
PV of future tax savings $45,000 × 8.811*
$ 364,995
*PVIFA for n = 10, i = 5% (Appendix D)
Actual expenditure
$1,500,000
PV of future tax savings
364,995
New cost of underwriting expense
on new issue
$1,135,005
CP16-1. (Continued)
3.
Cost savings in lower interest rates
9% (interest on old bonds) × $30,000,000
$2,700,000
6% (interest on new bonds) × $30,000,000
1,800,000
Savings per year
$ 900,000
Savings per year $900,000 × (1 – 30) = $630,000 after tax
$ 630,000
8.111 PVIFA (n = 10, i = 4%) (Appendix D)
$5,109,930
4.
Underwriting cost on old issue
Original amount (3% × $30,000,000)
$900,000
Amount written off over last 5 years at
$60,000 per year ($900,000/15)
300,000
Unamortized old underwriting cost
$600,000
Chapter 16: Long-Term Debt and Lease Financing
16-34
Present value of deferred future write–off
$60,000 × 8.111 (n = 10, i = 4%)
486,660
Immediate gain in old underwriting write–
off tax rate
$113,340
Tax rate
.30
After tax value of immediate gain in old
underwriting cost write-off
$ 34,002
CP16-1. (Continued)
Summary
Outflows
Inflows
1.
$1,680,000
3.
$5,109,930
2.
1,135,005
4.
34,002
$2,815,005
$5,143,932
PV of inflows
$5,143,932
PV of outflows
2,815,005
Net present value
$2,328,927
The refunding is financially feasible.
d. If Barton thought interest rates were going down even more,
Chapter 16: Long-Term Debt and Lease Financing
16-35
Appendix
16A–1. Settlement of claims in bankruptcy liquidation (LO5) The trustee in the bankruptcy
settlement for Titanic Boat Co. lists the following book values and liquidation values
for the assets of the corporation. Liabilities and stockholders’ claims are shown.
Liquidation
Assets Book Value Value
Accounts receivable ………………….. $1,400,000 $1,200,000
Inventory ………………………………….……..
1,800,000
900,000
Machinery and equipment …………………..
1,100,000
600,000
Building and plant …………………………..
4,200,000
2,500,000
Total assets
$8,500,000
$ 5,200,000
Liabilities and Stockholders’ Claims
Liabilities:
Accounts payable …………………………..
$2,800,000
First lien, secured by
machinery and equipment ………..……
900,000
Senior unsecured debt ………………..……
2,200,000
Subordinated debenture ……………………
1,700,000
Total liabilities ……………………….….
7,600,000
Stockholders’ claims:
Preferred stock …………………………..
250,000
Common stock …………………………..
650,000
Total stockholders’ claims ……….……
900,000
Total liabilities and
stockholders’ claims …………….. $8,500,000
a. Compute the difference between the liquidation value of the assets and the liabilities.
b. Based on the answer to part a, will preferred stock or common stock participate in
the distribution?
c. Assuming the administrative costs of bankruptcy, workers’ allowable wages, and
unpaid taxes add up to $400,000, what is the total of remaining asset value available
to cover secured and unsecured claims?
d. After the machinery and equipment are sold to partially cover the first lien secured
claim, how much will be available from the remaining asset liquidation values to
cover unsatisfied secured claims and unsecured debt?
Chapter 16: Long-Term Debt and Lease Financing
16-36
e. List the remaining asset claims of unsatisfied secured debt holders and unsecured
debt holders in a manner similar to that shown at the bottom portion of Table 16A-3.
f. Compute a ratio of your answers in part d and e. This will indicate the initial
allocation ratio.
g. List the remaining claims (unsatisfied secured and unsecured) and make an initial
allocation and final allocation similar to that shown in Table 16A-4 on page 527.
Subordinated debenture holders may keep the balance after full payment is made to
senior debt holders.
h. Show the relationship of amount received to total amount of claim in a similar
fashion to that of Table 16A-5 on page 527. Remember to use the sales (liquidation)
value for machinery and equipment plus the allocation amount in part g to arrive at
the total received on secured debt.