What will the after-tax annual interest savings

Assignment Help Financial Management

Reference no: EM13727383

Five years ago, Northwest Water (NWW) issued $40,000,000 face value of 30-year bonds carrying a 8% (annual payment) coupon. NWW is now considering refunding these bonds. It has been amortizing $4 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 6% in today's market. A call premium of 5% 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.

a. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of refunding?

b. What will the after-tax annual interest savings for NWW be if the refunding takes place?

c. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place?

d. What is the NPV if NWW refunds its bonds today?

Reference no: EM13727383

Questions Cloud

Cash flows for cash from financing activities : Walker Corporation conducted the following activities during 2001: (1) they sold 10,000 shares of their own stock for $15.00 per share; (2) they issued bonds for which they received $493,000;

Job characteristics and job demands : Explain how you can make changes in the job characteristics and job demands to increase job satisfaction and performance.

What historical root allowe your artifact to come into being : What historical roots allowed your artifact to come into being? Which cultural periods might have influenced its overall development as we see it today?

Create a growth and profitability strategy for exxon mobil : This week's team assignment involves your efforts to create a growth and profitability strategy for Exxon Mobil. As a MBA professional, you may be asked to help your organization, or a client organization, develop a strategy to push and deliver a..

What will the after-tax annual interest savings : Five years ago, Northwest Water (NWW) issued $40,000,000 face value of 30-year bonds carrying a 8% (annual payment) coupon. NWW is now considering refunding these bonds. It has been amortizing $4 million of flotation costs on these bonds over their 3..

Explain the difference between interval and ratio data : One of the products that Company W makes is snack foods. The research and development department of Company W has developed a new formula for one type of snack food that is cheaper to make than the current formula.

Case study-merger and acquisition : Throughout this course, you will review scenarios involving Company A, which has been acquired by Company B. Company A was founded in 1956 in Mobile, Alabama. The average age of its workforce is 57 and it is comprised of 40% Caucasian and 85% male..

Alternatives that exxon mobil should consider realize growth : Create a presentation of no more than 2 slides that evaluates alternatives that Exxon Mobil should consider to realize growth

What is the target stock price in one year : Plush Pilots, Inc. has balance sheet equity of $5.2 million. At the same time, the income statement shows net income of $743,600. The company paid dividends of $423,852 and has 130,000 shares of stock outstanding. If the benchmark PE ratio is 21, wha..

User Account

All Pages