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?

• A) $5,049,939
• B) $5,315,725
• C) $5,595,500
• D) $5,890,000
• E) $6,200,000

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Definitions:

Prenuptial Agreement

A legal document signed by a couple before marriage outlining the allocation of assets and financial responsibilities in the event of divorce.

Professional Indemnity Insurance

Insurance that protects professionals against legal costs and claims for damages from clients due to acts of professional negligence.

Policyholder

An individual or entity that owns an insurance policy and is entitled to coverage under that policy.

Claim Covered

A statement acknowledging that an insurance policy or warranty agreement will provide financial protection or reimbursement for a specific loss or damage.