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New York Waste (NYW) Is Considering Refunding a $50,000,000, Annual

question 22

Multiple Choice

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.
-What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?

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Definitions:

Financing Activities

Transactions that result in changes in the size and composition of the equity and borrowings of an entity.

Marketable Securities

Financial instruments that are easily convertible into cash and are therefore considered very liquid.

Investing Activities

Components of cash flow statements that show the cash spent on or generated from investments in long-term assets and financial instruments.

GAAP

Generally Accepted Accounting Principles, a set of accounting standards and practices used in the preparation of financial statements in the United States.