Bavarian Brew Bond Bavarian Brew Is Thinking About Recalling $30 Million of 15

Multiple Choice

Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year, $1,000 par value bonds, that were issued ten years ago. The bonds carry a coupon rate of 7.8% and have a call price of $1,110. Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000. Bavarian Brew wants to sell $30 million of 5 year, $1,000 par value bonds with a 5.8% coupon rate to retire the old bonds. The flotation costs on the new bond issue are estimated to be $525,000. Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds. Assume a tax rate of 34%
-Refer to Bavarian Brew Bond. What is the tax reduction caused by the unamortized flotation costs?

A) $500,000
B) $333,333
C) $56,667
D) $256,472