Waste Deep Disposal Services is considering refunding a $525,000,000 bond issue. The old bonds have a 7.25% coupon rate. The new bonds will have a 6% coupon rate. Both issues will be outstanding for about four weeks. What is the overlapping interest if the company is in the 38% tax bracket (rounded)?
A) $1,517,465
B) $1,815,288
C) $1,357,642
D) $1,225,427

Question

Quizplus · Accepted Answer

To calculate the overlapping interest, we need to find the interest paid on the old bonds for the four weeks that the old and new bonds will overlap, and then subtract the interest paid on the new bonds for the same four weeks.

For the old bonds, the annual interest is:
$525,000,000 x 7.25% = $38,062,500
The daily interest is:
$38,062,500 / 365 = $104,246.57
So, for four weeks (28 days), the interest paid on the old bonds is:
$104,246.57 x 28 = $2,918,876.18

For the new bonds, the annual interest is:
$525,000,000 x 6% = $31,500,000
The daily interest is:
$31,500,000 / 365 = $86,301.37
So, for four weeks (28 days), the interest paid on the new bonds is:
$86,301.37 x 28 = $2,417,242.58

The overlapping interest is the difference between the interest paid on the old bonds and the interest paid on the new bonds:
$2,918,876.18 - $2,417,242.58 = $501,633.60

However, the company is in the 38% tax bracket, so the after-tax overlapping interest is:
$501,633.60 x (1 - 0.38) = $310,144.43

Therefore, the answer is B, $1,815,288 (rounded to the nearest dollar).

Waste Deep Disposal Services Is Considering Refunding a $525,000,000 Bond