Final Answer
The net cost of the call premium after taxes is $585,000.
The correct answer is $585,000
Step-by-step explanation
To calculate the net cost of the call premium after taxes, we'll need to consider the following steps:
1. **Calculate the Tax Shield on the Call Premium:** The tax shield is the amount of tax savings due to the deduction of interest expenses. The formula for tax shield is Tax Shield = Tax Rate × Call Premium. Given the tax rate of 35% and the call premium of 9%, the tax shield would be 0.35 × $9,000,000 = $3,150,000.
2. **Determine the Net Cost of the Call Premium:** The net cost of the call premium is the actual cost of the premium after considering the tax savings. It's calculated by subtracting the tax shield from the call premium. The call premium is $9,000,000, and the tax shield is $3,150,000. Thus, the net cost of the call premium before taxes is $9,000,000 - $3,150,000 = $5,850,000.
3. **Final Calculation After Taxes:** To get the net cost after taxes, subtract the tax savings from the net cost before taxes. Therefore, the net cost of the call premium after taxes is $5,850,000 - $3,150,000 = $2,700,000.
However, this doesn't reflect the correct net cost after taxes. Apologies for the confusion earlier. Let's correct the calculation:
Given that the tax rate is 35% and the tax shield is $3,150,000, the correct net cost after taxes would be found by subtracting the tax shield from the call premium: $9,000,000 - $3,150,000 = $5,850,000.
So, after accounting for the tax shield, the net cost of the call premium after taxes is $5,850,000, not $2,700,000 as previously calculated. This revised figure accounts for the tax benefits derived from the call premium deduction.
The correct answer is $585,000