New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year...


New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% 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% 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. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.

What is the NPV if NYW refunds its bonds today?

Floatation Cost:

Flotation cost is the total cost incurred by an organization for issuing new securities. Those costs include legal cost, underwriting costs, commission and audit fees, etc. The flotation cost is expressed as a percentage of the original issue cost. However, generally, the flotation cost is incorporated into the market price of the security.

Answer and Explanation:

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Initial net outflows:

Total initial outflow {eq}= FC+ 14\% = $50,000,000*1.14 = $ 57,000,000 {/eq}

Initial inflow = FV - Flotation cost {eq}=...

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Learn more about this topic:

Cost of Capital: Flotation Cost, NPV & Internal Equity


Chapter 3 / Lesson 18

How does a business figure out the true cost and best means of obtaining capital? In this lesson, we will explore the cost of capital, flotation cost, net present value, and internal equity to help answer that question.

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