Problem 1: Long-term Debt Financing INPUT
Old issue New issue
Size (issued at par) 10,000,000 10,000,000
Coupon rate 11.00% 8.00% paid semiannually
Discount rate: cost of capital 15.00%
Total life 20 8 years
Term to maturity TTM 8 8 years
Call premium 4%
Underwriting cost (issue cost) 200,000 240,000
Corporate Income Tax rate 20%
Option 1: Keep the old issue
Option 2: Call the old issue and implement the new issue
Requirement: Determine which option the firm should choose
Notes for tax deductible items:
Call premium is an expense
Underwriting cost is an intangible fixed asset. The write-off of it is considered as a loss
Amortization of underwriting cost is an expense
Coupon is interest expense