New York Water (NYW) is considering whether to refund a $5 million, 12 percent coupon, 30-year...

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Finance

New York Water (NYW) is considering whether to refund a $5million, 12 percent coupon, 30-year bond issue that was sold 5years ago. It is amortizing $300,000 of flotation costs on the 12percent bonds over the 30-year life of that issue. NYW's investmentbankers have indicated that the company could sell a new 25-yearissue at an interest rate of 9 percent in today's market. A callpremium of 10 percent would be required to retire the old bonds,and flotation costs on the new issue would amount to $400,000.NYW's marginal tax rate is 40 percent. The new bonds would beissued at the same time the old bonds were called.
What is the relevant refunding investment outlay at t=0?
$425,000
$500,000
$600,000
$750,000
$800,000
What are the relevant annual interest savings for NYW ifrefunding takes place?
$50,000
$70,000
$90,000
$115,000
$125,000
What are the relevant annual flotation cost tax effects for NYWif refunding takes place?
$800
$1,000
$1,500
$2,400
$3,000
What is the NYW bond refunding's NPV?
$525,641
$651,635
$729,962
$824,258
$858,334

Answer & Explanation Solved by verified expert

3.9 Ratings (644 Votes)

Given data numbers in 1000 except Existing bond issue 5000 New bond issue 5000 Flotation cost 300 Flotation cost 400 Maturity years 30 Maturity years 25 Years since issue 5 New cost of debt 90 Call premium 10 Aftertax cost of debt 54 Original coupon rate 12 Tax rate 40 Initial outlay Formula In 000s Beforetax Aftertax Old bond amountcall premium Aftertax beforetax1tax rate Call See Answer

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New York Water (NYW) is considering whether to refund a $5million, 12 percent coupon, 30-year bond issue that was sold 5years ago. It is amortizing $300,000 of flotation costs on the 12percent bonds over the 30-year life of that issue. NYW's investmentbankers have indicated that the company could sell a new 25-yearissue at an interest rate of 9 percent in today's market. A callpremium of 10 percent would be required to retire the old bonds,and flotation costs on the new issue would amount to $400,000.NYW's marginal tax rate is 40 percent. The new bonds would beissued at the same time the old bonds were called.What is the relevant refunding investment outlay at t=0?$425,000$500,000$600,000$750,000$800,000What are the relevant annual interest savings for NYW ifrefunding takes place?$50,000$70,000$90,000$115,000$125,000What are the relevant annual flotation cost tax effects for NYWif refunding takes place?$800$1,000$1,500$2,400$3,000What is the NYW bond refunding's NPV?$525,641$651,635$729,962$824,258$858,334