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gfulfordweek5

# gfulfordweek5 - expensed each year The bonds were issued 5...

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Gayle Fulford F516 – Advanced Managerial Finance Problem 20-4 a) The call premium = (0.11)(\$40,000,000) = \$4,400,000.00 This is a tax deductible expense. The net after-tax cost of the call = \$4,400,000.00(1-T) \$4,400,000(1-0.40) = \$4,400,000(0.60) = \$2,640,000.000 b) The dollar flotation cost on the new issue = (\$40,000,000)(0.04) = \$1,600,000.00 It is not immediately tax deductible. The after-tax cost is \$1,600,000.00 c) Old-issue flotation cost = (\$40,000,000)(0.06) = \$2,400,000 Because the cost is deferred and amortized for 25 years: \$2,400,000/25 = \$96,000.00 is
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Unformatted text preview: expensed each year. The bonds were issued 5 years ago: 5/25(\$2,400,000) = \$480,000 already expensed Remaining to be expensed = \$2,400,000 - \$480,000 = \$1,920,000 If the old cost is refunded the remaining to be expensed can be immediately expensed and will result in a tax savings of T(\$1,920,000) = (0.4)((\$1,920,000)= \$768,000.000 d) Net after-tax cash outlay required to refund the old issue: Old issue call premium \$2,640,000 New issue flotation cost 1,600,000 Tax savings on old issue flotation costs (768,000 ) Net cash outlay \$3,472,000...
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