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

question 21

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 will the after-tax annual interest savings for NYW be if the refunding takes place?

• A) $664,050
• B) $699,000
• C) $768,900
• D) $845,790
• E) $930,369

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Definitions:

Acquisition Transaction

An agreement in which one company purchases most or all of another company's shares to gain control of that company.

Fair Value

The asset's selling rate or the price required to manage a liability in a procedural transaction between participants in the market during the specified measurement interval.

Common Stock

A type of equity security that represents ownership in a corporation, with holders typically having voting rights and dividend receiving potential.

Par Value

The face value of a bond or stock as stated by the issuing company, which is not indicative of its market value.