Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds carrying a 14% (annual payment) coupon. NWW isnow considering refunding these bonds. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. Thecompany 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 berequired 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 newbonds would be issued when the old bonds are called.a. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?b. What will the after-tax annual interest savings for NWW be if the refunding takes place?

Answered: Five years ago, NorthWest Water (NWW)…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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