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ive 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?

Respuesta :

ajeigbeibraheem

Answer:

the  required after-tax refunding investment Outlay is  $6,200,000

Explanation:

Given that:

NorthWest Water (NWW) issued $50,000,000 face value

Time of issuance = 5 years ago

Bond = 30

Annual coupon payment = 14%

Amortizing amount of floating costs on these bonds over the 30 - year life is $3 million

Also;The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market.

Call premium = 14%

NWW's marginal tax rate is 40%

The objective from the given data set is to find the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding.

Initial Outlay = After tax call premium + Floatation  cost - Unexpensed float cost

Initial Outlay = [tex](0.14 *50,000,000) + (1 - 0.40)+ $3,000,000 - ($3,000,000)*(\dfrac{25}{30})*0.40[/tex]

Initial Outlay  [tex]=4,200,000+ 3,000,000-1,000,000[/tex]

Initial Outlay = $6,200,000

Therefore ; the  required after-tax refunding investment Outlay is  $6,200,000

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