NARRBEGIN: Bavarian Brew Bond

NARRBEGIN: Bavarian Brew Bond
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 discount on the old bonds?

A) $1,500,000
B) $1,000,000
C) $340,000
D) $187,000