Jan Volk, financial manager of Green Sea Transport(GST), has been asked by her boss to review GST's outstanding debt issues for possible bond refunding. Five years ago, GST issued $40,000,000 of 11%, 25 year debt. The issue, with semiannual coupons, is currently callable at a premium of 11%, or $110 for each $1,000 par value bond. Flotation costs on this issue were 6%, or $2,4000,000.
Volk believes tha GST could issue 20-year debt today with a coupon rate of 8%. The firm has placed many issues in the capital markets during the last 10 years, and its debt flotation costs are currently estimated to be 4% of the issue's value. GST's federal-plus-stae tax rate is 40%.
What is the toatl dollar call premium required to call the old issue? Is the tax deductible? What is the net after-tax cost of the call?