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New Jersey Water Co




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?


Paper#35460 | Written in 18-Jul-2015

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