Suppose that d'Anconia Copper retained the $200 million in cash so that it would not need to raise new funds from outside investors for an expansion it has planned for next year.If it did raise new funds,it would have to pay issuance fees.Assuming that these fees can be expensed for corporate tax purposed,the amount that d'Anconia Copper needs to save in issuance fees to make retaining the cash beneficial for its investors is closest to:
A) $2.0 million
B) $5.5 million
C) $6.5 million
D) $7.0 million

Question

Quizplus · Accepted Answer

A) If the investors had invested the $200 million themselves: Net amount = investment × interest × (1 - ordinary tax rate) = $200 million × 5% × (1 - 30%) = $7.0 million
The amount if the corporation reinvests: Net amount = investment × interest × (1 - corporate tax rate)(1 - cap gains rate) = $200 million × 5% × (1 - 35%)(1 - 15%) = 5.525 million
Total savings then must be equal to 11ea7e60_15ee_c11f_ba34_11190a7628ba_TB1624_11 = $2.269 million in fees

Suppose That D'Anconia Copper Retained the $200 Million in Cash