New York Waste (NYW) is considering refunding a $50,000,000, annualpayment, 14 percent coupon, 30-year bond issue that was issued fiveyears ago. It has been amortizing $3 million of flotation costs onthese bonds over their 30-year life. The company could sell a newissue of 25-year bonds at an annual interest rate of 11.67 percentin today's market. A call premium of 14 percent would be requiredto retire the old bonds, and flotation costs on the new issue wouldamount to $3 million. NYW's marginal tax rate is 40 percent. Thenew bonds would be issued when the old bonds are called.
The amortization of flotation costs reduces taxes, and thusprovides an annual cash flow. What will the net increase ordecrease in the annual flotation cost tax savings be if refundingtakes place?
(a) $6,480
(b) $7,200
(c) $8,000
(d) $8,800
(e) $9,680
The amortization of flotation costs reduces taxes, and thusprovides an annual cash flow. What will the net increase ordecrease in the annual flotation cost tax savings be if refundingtakes place?
(a) $6,480
(b) $7,200
(c) $8,000
(d) $8,800
(e) $9,680
Related questions
| 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.The amortization of flotation costs reduces taxes and thus provides an annual cash flow. (PLEASE SHOW ALL WORK AND CALCULATIONS) |
