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 will the after-tax annual interest savings for NYW be if the refunding takes place? (a) $664,050 (b) $699,000 (c) $768,900 (d) $845,790 (e) $930,369

Explanation / Answer

ANSWER: B, $699,000 Old Interest: $50,000,000(.14)(0.6)=$4,200,000 New Interest: $50,000,000(0.1167)(0.6)=($3,501,000) Net Annual interest Savings is $699,000

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