(Answered) Dairy corp has a 20 million bond obligation outstanding and

Management Studies

Dairy Corp. has a $20 million bond obligation outstanding and a coupon rate of 8%. Dairy Corp. has the ability to buy back the debt at 7% above par and issue new debt at 6.5%, so it is considering refunding this bond. Assume the underwriting cost for the old issue was $100,000 and the new issue is $200,000, with a tax rate of 40%. What is the net cost of call premium?

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