Decrease in the annual flotation cost tax savings

Assignment Help Financial Management
Reference no: EM131356039

Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds carrying a 14% (annual payment) coupon. NWW is now considering refunding these bonds. 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. NWW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. The amortization of flotation costs reduces taxes and thus provides an annual cash flow.

Please answer this question.

What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place?

Reference no: EM131356039

Questions Cloud

What is the market value of the firm debt : Droz's Hiking Gear Company has found that its common equity shares have a beta equal to 1.50 while the risk-free return is 12 percent and the market risk premium is 6 percent. It has 10-year bonds outstanding with a market price of $1,000, a face val..
Result in a bond with the greatest price volatility : Which of the following set of conditions will result in a bond with the greatest price volatility?
What is net asset value at the start and end of the year : Consider a mutual fund with $207 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $4 million. What is net asset value ..
Current company success-trouble in the marketplace : Review the financial picture and the current company success/trouble in the marketplace. See if you can use the financial statements to tell us the story of the company. Why you selected this company for analysis. How did the numbers provide informat..
Decrease in the annual flotation cost tax savings : Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds carrying a 14% (annual payment) coupon. NWW is now considering refunding these bonds. It has been amortizing $3 million of flotation costs on these bonds over their ..
Effective annual interest rate on lending arrangement : You’ve worked out a line of credit arrangement that allows you to borrow up to $45 million at any time. The interest rate is .49 percent per month. In addition, 6 percent of the amount that you borrow must be deposited in a non-interest-bearing accou..
Estimated quarterly sales for the next year : The Grain and Feed Store purchases are equal to 68 percent of the following quarter's sales. The accounts receivable period is 15 days and the accounts payable period is 30 days. Assume there are 30 days in each month. The store has estimated quarter..
What is duration if the yield to maturity : Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 6.7%. What is the duration if the yield to maturity is 10.7%?
What is the effective annual cost of trade credit : Your supplier offers terms of 1.1/8, net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45? The effective cost of the trade credit is   %?

Reviews

Write a Review

Financial Management Questions & Answers

  Start small commercial bakery to supply gourmet deserts

Sam wants to start a small commercial bakery to supply gourmet deserts to local restaurants. He believes that with his product line and his connections in the restaurant business, he can grow the business over the next five years into a profitable ni..

  Bond price-maturity and market interest rate

Compute the price of a 5.5 percent coupon bond with 15 years left to maturity and a market interest rate of 8.8 percent.

  What is the incremental operating profit

Bangers, Inc. is a start-up manufacturer of Australian-style frozen veggie pies located in San Antonio, Texas. The company is five years old and recently installed the manufacturing capacity to quadruple its unit sales. what is the incremental operat..

  First payment will go to paying down the principal balance

On June 1, you borrowed $220,000 to buy a house. The mortgage rate is 4.25% compounded monthly. The loan is to be repaid in equal monthly payments of $1,655.02 over fifteen years. The first payment is due on July 1. How much of this first payment wil..

  What is the NPV of this investment

Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $820,322, $863,275, $937,250, $1,018,610, $1,212,960, and $1,225,000 over the next six years. If the appropriate disco..

  Beta coefficient important when constructing a portfolio

What Makes a Beta Coefficient so Great? What makes a beta coefficient important when constructing a portfolio?

  Calculating the net present value of new office complex

Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $100,000; however, a commercial real estate agent has informed you that an outside buyer is intere..

  Dividends are expected to grow at rate

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 11 percent, and the company just paid a di..

  Find the proceeds on the third-party discount note

A man holds a note of $5,000 that has an interest rate of 12% annually. The note was made on March 19 and is due November 11. He sells the note to a bank on June 11 at a discount rate of 11% annually. Find the proceeds on the third-party discount not..

  The percent price change due to both duration and convexity

A 5.5% coupon bearing bond that pays interest semi-annually has a yield to maturity of 4.8% per year. This bond has a duration of 10 years and a convexity of 157. If the market yield decreases 60 basis points, calculate an estimate of the percent pri..

  Inflation and taxes on asset income

Suppose that the tax rate on asset income is Tc and tax is leived on nominal interest income. Assume that the tax applies to the real returns on capital. what is the after tax real interest rate on bonds? consider permanet, unanticipated increase in ..

  What will be the new operating cash flow

A proposed project has fixed costs of $96,000 per year. The operating cash flow at 6,600 units is $96,200. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise from 6,600 to 7,100, what will be the new operating ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd