Oxford Corp. is considering refunding a $30,000,000, annual payment, 12 percent coupon, 30 year bond issue that was issued five years ago. It has been amortizing $2 million of flotation costs on these bonds over their 30 year life. The company could sell a new issue of 25 year bonds at an annual interest rate of 10 percent in today’s market. A call premium of 12 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $2 million. Oxford’s marginal tax rate is 30 percent. The new bonds would be issued when the old bonds are called.
What is the required after tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?
(a) 4,520,000
(b) 3,020,000
(c) 4,020,000
(d) 5,020,000