A company could sell $125 million in bonds to finance an aquisition. The annual interest rate would be 6.5% and they would mature in 15 years. Annual principal repayments of $6.25 million would be required, leaving $37.5 million outstanding at maturity.
At the company's current marginal tax rate of 35%, the 6.5% rate would be the equivalent of 4.225% on an after-tax basis, due to the tax shield allowed on interest payments.
1. Calculate the NPV of the total cash outflow( including interest payments) on a after-tax basis.
2. Calculate the NPV of total cash outflow (including interest payments) on a after-tax basis. Assume no anual principal payments, instead, a principal payment of $125 million at mautrity.
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