Question 14 options:

Lannister Corporation is considering replacing its $1 million preferred share issue that they issued 2 years ago. The following information is applicable:

The existing preferred shares have a dividend of $5.00 per share, which is 12% of the par value.

The market yields have fallen to 6%. The underwriting (flotation) costs for a new preferred issue is 2.0% of par value (underwriting costs will qualify for 5 years for tax purposes). The tax rate is 36%. There will be a dividend overlap period of 1 month.

There will be 2 months overlap period were the interest will be received from the new issue. This can be invested for 8%. The cost of capital (K_e) = 15%. There is no additional call protections.

Round all parts to the nearest dollar.

What is the cost of the call premium?

DO NOT round any number until the final calculation. Use your store and recall function on your calculator.

Please use a negative. For example, -500000

What is the PV of the tax savings for the underwriting costs? Just the tax savings again.

What is the cost of the old dividends in the dividend overlap period?

Please use a negative. For example, -500000

What is the interest earned in the dividend overlap period?

What is the PV of the benefits or savings in dividends?