In: Finance
NorthWest Water (NWW) Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds carrying a 14% (annual payment) coupon. NWW is now considering refunding these bonds. 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. NWW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. Refer to the data for NorthWest Water (NWW). What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?
Following Information is given
FV | $50,000,000 |
Time of issuance | 5 yeras |
Bond | 30 Year Life |
Annual Coupon Rate | 14% |
Amortization Amount | $3000000 |
Call Premium | 14% |
Tax Rate | 40% |
Initial Outlay = After tax call premium + Flotation Cost - Unexpensed float cost
=(14% x 50,000,000)( 1 - 0.40) + 3000000 - (3000000) x (25 / 30) x 0.40
= 4200000 + 3000000 - 1000000
= $6200000
Required answer is $6200000.