NorthWest Water (NWW) Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds...

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?

Expert Solution

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.

jeff jeffy answered 3 years ago

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