New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14

Question

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14 percent coupon, 30-year bond issue that was issued five years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67 percent in today's market. A call premium of 14 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40 percent. The new bonds would be issued when the old bonds are called.

What is the NPV if NYW refunds its bonds today?

Explanation / Answer

Appropriate discount rate = New bond cost × (1 T) = 7.002%

Financial calculator solution:
Inputs: N = 25; I/YR = 7.0; PMT = 699,000 + 8,000 = 707,000; FV = 0.

Output: PV = -$8,237,599 = PV of savings = $8,237,599
Cost to refund = 6,200,000
NPV of the refunding = $2,037,599

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