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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This note was uploaded on 05/01/2011 for the course FIN 5516 taught by Professor Clyne during the Spring '11 term at DeVry Buckhead.

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