Problem 7-40 (LO. 3, 5) Mila purchased a Zaffre Corporation $100,000 bond 10 years ago for its face value. The bond pays 5% interest annually. In a "Type E" reorganization, Zaffre exchanges Mila's bond, with 10 years remaining, for a 15-year bond also having a face value of $100,000 but paying 4.5% annual interest. Mila earns a 3% after-tax rate of return, and she is in the 25% state and Federal income tax bracket for all years. Determine if this is an equitable exchange for Mila by completing the computations in the table below. Then, indicate if the exchange is or is not beneficial to Mila. When required, round your answers to the nearest dollar. If an amount is zero, enter "0". Click here to access the present value tables. Present value of the face value of bond Plus: Present value of interest payment, net of tax Total net present value of bond 10-Year Bond 15-Year Bond 74,410 64,190 X Based on net present value of the two bonds, the exchange is not beneficial to Mila. X x
Problem 7-40 (LO. 3, 5) Mila purchased a Zaffre Corporation $100,000 bond 10 years ago for its face value. The bond pays 5% interest annually. In a "Type E" reorganization, Zaffre exchanges Mila's bond, with 10 years remaining, for a 15-year bond also having a face value of $100,000 but paying 4.5% annual interest. Mila earns a 3% after-tax rate of return, and she is in the 25% state and Federal income tax bracket for all years. Determine if this is an equitable exchange for Mila by completing the computations in the table below. Then, indicate if the exchange is or is not beneficial to Mila. When required, round your answers to the nearest dollar. If an amount is zero, enter "0". Click here to access the present value tables. Present value of the face value of bond Plus: Present value of interest payment, net of tax Total net present value of bond 10-Year Bond 15-Year Bond 74,410 64,190 X Based on net present value of the two bonds, the exchange is not beneficial to Mila. X x
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 7-40 (LO. 3, 5)
Mila purchased a Zaffre Corporation $100,000 bond 10 years ago for its face value. The bond pays 5% interest annually. In a "Type E"
reorganization, Zaffre exchanges Mila's bond, with 10 years remaining, for a 15-year bond also having a face value of $100,000 but paying
4.5% annual interest. Mila earns a 3% after-tax rate of return, and she is in the 25% state and Federal income tax bracket for all years.
Determine if this is an equitable exchange for Mila by completing the computations in the table below. Then, indicate if the exchange is or is
not beneficial to Mila.
When required, round your answers to the nearest dollar. If an amount is zero, enter "0".
Click here to access the present value tables.
Present value of the face value of bond
Plus: Present value of interest payment, net of tax
Total net present value of bond
10-Year Bond
15-Year Bond
74,410
64,190
X
Based on net present value of the two bonds, the exchange is not
beneficial to Mila.
X
x
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