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# The Bowman Corporation has \$20 million bond obligation outstanding,

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The Bowman Corporation has \$20 million bond obligation outstanding, which is considering refunding. Though the bonds were issued at 12 percent, the interest rates on similar issues have declined to 10.5 percent. The bonds were originally issued for 20 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 \$20,000,000 issue is \$570,000 and the underwriting cost on the old iss was \$400,000. The company is in a 35 percent tax bracket, and it will us a 7 percent discount rate to analyze the refunding decision. Should the old issue be refunded with new debt?

howell auto parts is considering whether to borrow funds and purchase an asset or to lese 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 percent interest. the firm will use the three-year MACRS depreciation category (with the associated four-year write off). Assume a tax rate of 35 percent. The other alternative is to sign two operation leases, one with payments of \$2,600 for the first two years, and the other with payments of \$4,600 for the last two years. in your analysis, round all values to the nearest dollar.

a. compute the aftertax cost of the leases for the four years.
b. compute the annual payment for the loan (round to the nearest dollar).
c. compute the amortization schedule for the loan.
d. determine the depriciation schedule.
e. compute the aftertax cost of the borrow-purchase alternative.
f. compute the present value of the aftertax cost of the two alternatives. use a discount of 8%.
g. Which alternative should be selected, based on minimizing the present value of aftertax cost?

Assume the following financial data for Noble Corporation and Barnes Enterprises:

Noble Barnes
Corporation Enterprises
Total earnings \$1,200,000 \$3,600,000
Number of shares of stock outstanding 600,000 2,400,000
Earnings per share \$2.00 \$1.50
Price-earnings ratio (P/E) 24× 32×
Market price per share \$48 \$48

a. If all the shares of the Noble Corporation are exchanged for those of Barnes Enterprises on a share-for-share basis,
what will postmerger earnings per share be for Barnes Enterprises? Use an approach similar to that of Table 20–3
on page 627.

b. Explain why the earnings per share of Barnes Enterprises changed.

c. Can we necessarily assume that Barnes Enterprises is better off after the merger?
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