A firm issued a callable bond 2 years ago. The bond\'s face value is $1 million.

Question

A firm issued a callable bond 2 years ago. The bond's face value is $1 million. This bond now has 6 more years to mature but can be called at this time. The comapny is considering refinancing this bond. Total flotation cost at the time of issue was $140,000. Tax rate is 40 percent. Calculate the amortized flotation cost as well as the annual tax savings associated with the flotation cost.

A. Amortized flotation cost $7,000; Tax savings $17,500

B. Amortized flotation cost $17,500; Tax savings $7,000

C. Amortized flotation cost $23,333.33; Tax savings $9,333.33

D. Amortized flotation cost $125,000; Tax savings $50,000

Refer to the above bond refunding problem. If the bond is to be refinanced at this time, how much of the flotation cost is yet unexpensed for tax purposes?

A. $17,500

B. $35,000

C. $105,000

D. $42,000

Explanation / Answer

1. C. Amortised floatation cost $ 23333.33 and which is calculated as. 140000/6 means floatation cost is devided by no.of years. And tax saving is 23333.33* 40%= 9333.33

2. C. 140000/8 = $17500*6= $105000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.