New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14%
ID: 2759434 • 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 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. 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
The answer is b). Please find the working below
Sr. No Particulars Principal Before tax rate After tax rate Interest A) Interest on current bond ( Net of tax 50,000,000.00 14.00% 8.40% 4,200,000.00 B) Interest on new bond 50,000,000.00 11.67% 7.00% 3,501,000.00 A) - B) Savings 699,000.00