What is the relevant refunding investment outlay?

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New Jersey Water Co (NJWC) is considering whether to refund a $50 million, 14% coupon, 30-year bond issue that was sold 5 years ago. It is authorizing $3 million of flotation costs on the 14% bonds over the 30-year life of that issue. NJWC's investment bankers have indicated that the company could sell a new 25-year issue at an 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. NJWC's marginal tax rate is 40%. The new bonds would be issued at the same time the old bonds were called.

a. What is the relevant refunding investment outlay?

b. What are the relevant annual interest savings for NJWC if refunding takes place?

c. What are the relevant annual flotation cost tax effects for NJWC if refunding takes place?

d. What is the NJWC bond refunding's NPV?

Reference no: EM13879744

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