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% coupon, 30-year bond issue that was issued 5 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% in today's market. A call premium of 14% 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%. The new bonds would be issued when the old bonds are called. 7 What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding? a. $5,049,939 b. $5,315,725 c. $5,595,500 d. $5,890,000 e. $6,200,000

Explanation / Answer

Amount: $50,000,000                Call premium %: 14%

Old rate: 14.00% Tax rate: 40%

Original life: 30 New rate: 11.67%

Years ago issued: 5 New life: 25

Orig. flotation cost: $3,000,000                New flotation cost: $3,000,000

Years remaining on old bond: 25

Old issue flotation costs:

Remaining unexpensed = (25/30)($3) = $2,500,000

Tax saving on unexpensed float cost = $2.5(T) = $2.5(0.4) = -1,000,000

After tax cost of call premium: 0.14($50)(0.6) = 4,200,000

Flotation costs on new issue: 3,000,000

Net after-tax cost to call the bonds: 6,200,000

E) $6,200,000

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.