New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14

Question

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14 percent coupon, 30-year bond issue that was issued five 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 percent in today's market. A call premium of 14 percent 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 percent. The new bonds would be issued when the old bonds are called.  

Explanation / Answer

NPVof refunding= -700,000-300,000 + ((700,000+2,500,000)*0.40)/1.1167 + (116500*0.6)PVIFA(11.67%,25) + 20,000*0.40 PVIFA(11.67%,25)

= -1,000,000 + 1,146,234.44 + 120,000*8.0263+8000*8.0263

= $1,173,600.84

Yes The bond should be refunded

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