The floatation cost, the initial maturity, and the number of years remaining to maturity are shown in the following table for a number of bonds. The firm is in the 40 percent tax bracket.
|
Bond
|
Floatation
Cost
|
Initial Maturity
of Bond
|
Years Remaining
to Maturity
|
|
A
|
$250,000
|
30 years
|
22 years
|
|
B
|
500,000
|
15
|
5
|
|
C
|
125,000
|
20
|
10
|
|
D
|
750,000
|
10
|
1
|
|
E
|
650,000
|
15
|
6
|
a. Calculate the annual amortization of the flotation cost for each bond.
b. Determine the tax savings, if any, expected to result from the unamortized floatation cost if the bond were called today.