New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14%
ID: 2732703 • Letter: N
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 15% 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. 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) $999,000
Explanation / Answer
ANS: (b) $699,000
Explanation
Old interest $50,000,000(0.14)(0.6) = $4,200,000
New interest $50,000,000(0.1167) (0.6) =(3,501,000)
Net annual savings =$699,000