Booyah Company has a callable bond issue,with 55,000 bonds with $1000 par outstanding.If the call price is $1125 per bond,and Booyah's tax rate is 35%,what is the after-tax cost of calling the bonds?

Question

Quizplus · Accepted Answer

The after-tax cost of calling the bonds is calculated by first determining the total cost of calling the bonds and then adjusting this amount for the tax savings. The total cost of calling the bonds is the call price ($1125) multiplied by the number of bonds (55,000), which equals $61,875,000. The tax savings from this cost is calculated by multiplying the total cost by the tax rate (35%), which equals $21,656,250. The after-tax cost is the total cost minus the tax savings: $61,875,000 - $21,656,250 = $40,218,750. However, the correct calculation should consider the tax impact differently, as the cost of calling bonds is not typically tax-deductible. Therefore, the initial calculation approach was incorrect, and the correct after-tax cost is not directly influenced by the tax rate in the usual manner of operating expenses. The correct answer involves recognizing that the question's premise on tax impact might be misleading, as call premiums are not tax-deductible expenses. Thus, the after-tax cost of calling the bonds is simply the call price times the number of bonds, without a tax adjustment. This oversight in the explanation led to an incorrect conclusion. The correct after-tax cost should be calculated without considering tax savings on the call premium, as such costs are not typically tax-deductible. Therefore, the correct answer should reflect the total cost of calling the bonds without a tax adjustment, which is not provided among the options, indicating a mistake in the initial calculation or interpretation of the question's requirements.

Booyah Company Has a Callable Bond Issue,with 55,000 Bonds with $1000