Consider yourself the CFO of ToughNut Corp. Management is considering whether the company should refund its $696,000, 14.50% coupon 0-year bond issue that was sold at par 3 years ago. The flotation cost on this issue was $3,480 that has been amortizing on a straight-line b over the 10-year original life of the issue. ToughNut Corp has a tax rate of 40%, and current short-term rates are 6% You have collected the following data about the existing bond and the potential n ew bond issue: Data Collected Existing Bond New Bond $696,000 $696,000 Capita $3,480 Flotation cost $3,074 Maturity 10 Years since issue Coupon 14.50 8.70% Call premium 11.60% After-tax cost of new debt 5.22% The associate financial analyst on the finance team has done some preliminary refunding analysis and submitted the following calculations to you. Consider this as step 1 in the refunding analysis. Assume that the company pays no additional interest on the old issue and earns no interest on short-term investments. Check if the calculations that the financial analyst submitted are correct and match your analysis. Check each box that has a correct value. If a value is incorrect, do not check the corresponding box Step 1: Determining the initial investment outlay Schedule of Cash Flows Before Tax After Tax Check if Correct Investment Outlay Call premium on the old bond $80,736 $48,442 $3,074 $3,074 Flotation cost on new issue Immediate tax savings on old flotation cost expense $2,436 $974 Total after-tax investment $50,542 nformation given to you, solve for step 2 (annual flotation cost tax effects) and step 3 (annual Based on the nterest savings) by completing the following steps in the refunding analysis. Step 2: Calculating the annual flotation cost tax effects 1. For tax purposes, the flotation cost must be amortized over the life of the new bond, which is 8 years Thus, the after-tax saving every year for the next 8 years will be 2. ToughNu t Corp., however, w no longer receive a tax deduction on the flotation cost on the old issue and will thus lose an after-tax benefit of 3. The net amortization tax effect on the flotation cost is the difference between the old and the new issue, which is per year for the next years. If the company issues new bonds, the tax savings from amortizing the flotation costs will