Speed Racer, Inc.
Speed Racer, Inc. is thinking about retiring a $100,000,000 issue of bonds that it sold to the public 20 years ago. The original maturity date for the bonds was 30 years.
-Refer to Speed Racer,Inc.If the bonds were initially sold at 98,then what is the after-tax cash flow effect,today,of the accelerated amortization if Speed Racer is in the 40% marginal tax bracket?

Question

Quizplus · Accepted Answer

.98 ´ 100,000,000 = 98,000,000 =====> total discount 2,000,000
amortization of discount per year: 2,000,000 / 30 = 66,666.67
10 years of accelerated amortization: 10 ´ 66,666.67 = 666,666.67
Cash flow from acceleration: 666,666.67 ´ .4 = 266,666.67

Speed Racer, Inc. Speed Racer, Inc. Is Thinking About Retiring a $100,000,000 Issue