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

Question

1. 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 10% 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. Should the bonds be refunded? Calculate the NPV of refunding.

Explanation / Answer

NPVof refunding= -700,000-300,000 + ((700,000+2,500,000)*0.40)/1.10 + (200,000*0.6)PVIFA(10%,25) + 20,000*0.40 PVIFA(10%,25)

= -1,000,000 + 1,163,636.4 + 120,000*9.077 +8000*9.077

= $1,325,497.5

Yes The bond should be refunded

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects