Scenario: ABC Waste ABC Waste (ABCW) Is Considering Refunding a $50,000,000, Annual Payment

question 65

Multiple Choice

Scenario: ABC Waste
ABC Waste (ABCW) 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 8.4% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. ABCW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
-Refer to Scenario: ABC Waste. What will the after-tax annual interest savings for ABCW be if the refunding takes place?

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

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Definitions:

Joint Costs

The costs that are incurred from producing multiple products in the same process, not easily attributed to individual products.

Sales Values

The total revenue generated from goods or services sold by a business.

Direct Costs

Expenditures directly traceable to the production of specific goods or services, such as raw materials and labor.

Gross Margins

The difference between revenue and cost of goods sold divided by revenue, expressed as a percentage, indicating the financial health and profitability of a business.