New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14
ID: 2702685 • Letter: N
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.
Explanation / Answer
NPVof refunding= -700,000-300,000 + ((700,000+2,500,000)*0.40)/1.1167 + (116500*0.6)PVIFA(11.67%,25) + 20,000*0.40 PVIFA(11.67%,25)
= -1,000,000 + 1,146,234.44 + 120,000*8.0263+8000*8.0263
= $1,173,600.84
Yes The bond should be refunded