Question

Xyz is a city of 100,000 people with a ratable base of 500mm. The current property tax rate is 5%, and property taxes make up 100% of the city's revenue.. The city needs to build utility infrastructure to support new developments that will increase their ratable base by $75 mm in 3 years. The estimated costs of this project is anticipated to be 25mm. They currently have a 7.5mm cash surplus, 50% of which can be immediately advanced and allocated towards the work. They will finance the remaining amount by issuing a 10-year bond at 4.5% (the par equal to the remaining project balance). Current budget estimates are to break even this year and run at a 10% loss next year. They currently have 20mm in bonds outstanding that mature in 5 years at an average interest rate of 3%. They will need to refinance these bonds at that time at the current market yield rate. City officials are not planning to raise property taxes.

What is XYZ's projected revenue & expense over the life of the new bonds?

Answer 1

XYZ's projected revenue over the life of the new bonds is $28.75 million, taking into account the current property tax rate and the expected increase in the ratable base. The expenses will include the costs of the utility infrastructure project and the refinancing of existing bonds.

Step-by-step explanation:

To project XYZ's revenue and expenses over the life of the new bonds, we need to consider various factors. First, let's determine XYZ's revenue. Currently, the property tax rate is 5% and property taxes make up 100% of the city's revenue. The ratable base is $500 million, so the city's current revenue from property taxes is $25 million ($500 million * 5%).

Next, let's calculate the projected revenue from the new developments. The new developments will increase the ratable base by $75 million in 3 years. Assuming the property tax rate remains the same, the additional revenue from these developments will be $3.75 million ($75 million * 5%) over the 3-year period.

To calculate XYZ's expenses, we need to consider the costs of the utility infrastructure project. The estimated cost of the project is $25 million. The city has a cash surplus of $7.5 million, and 50% of this surplus ($3.75 million) can be immediately allocated towards the work. The remaining $21.25 million ($25 million - $3.75 million) will be financed by issuing a 10-year bond at 4.5% interest.

Additionally, XYZ currently has $20 million in bonds outstanding that mature in 5 years. These bonds have an average interest rate of 3%. At the time of maturity, the city will need to refinance these bonds at the current market yield rate.

Considering all these factors, XYZ's projected revenue over the life of the new bonds will be $28.75 million ($25 million + $3.75 million). The projected expenses will include the costs of the utility infrastructure project and the refinancing of the existing bonds.

In conclusion, XYZ's projected revenue over the life of the new bonds will be $28.75 million and the expenses will depend on the costs of the utility infrastructure project and the refinancing of the existing bonds.