New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 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.

$699,000

Explanation:

Calculation for New York Waste (NYW) after-tax annual interest savings if the refunding takes place;

First step is to calculate for the old interest:

Old interest $50,000,000(0.14 )(0.6)

= $4,200,000

Second step is to calculate for the New interest:

New interest =$50,000,000(0.1167)(0.6)

= 3,501,000

Last step is to deduct new interest from old interest in order to arrived at the Net annual interest savings

$4,200,000-3,501,000

= $699,000

Therefore the New York Waste (NYW) after-tax annual interest savings if the refunding takes place will be $699,000

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