Question

1. For this and the next 3 question. New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14.5% 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 be $3 million. The company's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. Calculate the initial cost of the refunding?

   		$5,049,939
   		$5,315,725
   		$5,595,500
   		$5,890,000
   		$6,200,000
   		None of the above

2. Calculate the after-tax annual INTEREST SAVINGS if the refunding takes place.

   		$664,050
   		$699,000
   		$768,900
   		$849,000
   		$930,369
   		None of the above

3. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. Calculate the net increase or decrease in the annual flotation cost tax savings if refunding takes place.

   		$8,000
   		$6,480
   		$7,200
   		$8,800
   		$9,680
   		None of the above

4. What is the NPV if the bonds are refunded today?

   		$1,746,987
   		$1,838,933
   		$1,935,719
   		$2,037,599
   		$3,785,322
   		None of the above

Answer 1