Consider yourself the CFO of Toughnut Corp. Management is considering whether the company should refund its $936,000, 19.50% coupon, 10-year bond issue that was sold at par 3 years ago. The flotation cost on this issue was $4,680 that has been amortizing on a straight-line basis 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 new bond issue: Data Collected Existing Bond $936,000 $4,680 10 3 19.50% New Bond $936,000 $4,134 8 Capital Flotation cost Maturity Years since issue Coupon Call premium After-tax cost of new debt 0 11.70% 15.60% 7,02% 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 Determine if the calculations that the financial analyst submitted are correct and match your analyss by selecting "Corred" or "Incorrect" in the column on the right. (Note: Do not round Intermediate calculations. Round final answers to the nearest whole dollar) Schedule of Cash Flows Before Tax After Tax Check if Correct Investment Outlay Call premium on the old bond Flotation cost on new issue Immediate tax savings on old flotation cost expense Total after-tax investment -$146,016 -$4,134 $3,276 -$87,610 -$4,134 $1,310 $90,434 Based on the information given to you, solve for step 2 (annual flotation cost tax effects) and stop 3 (annual interest 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. ToughNut Corp, however, will 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 arnortization tax effect on the flotation cost is the difference between the old and the new issue, which is next years. If the company issues new bonds, the tax savings from amortizing the motation costs will per year for the Step 3: Calculating the annual interest savings 1. The annual coupon payments on the old bonds were $182,520.00. Thus, the after-tax interest on the old issue is 2. The after-tax interest on the new bonds is 3. Thus, the net annual interest savings after tax will be Value Present value of amortized tax effects Present value of interest savings Net investment outlay NPV from refunding -$90,434