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Memphic Memphic
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5 years ago
Suppose that d'Anconia Copper retained the $200 million in cash so that it would not need to raise new funds from outside investors for an expansion it has planned for next year. If it did raise new funds, it would have to pay issuance fees. Assuming that these fees can be expensed for corporate tax purposes, the amount that d'Anconia Copper needs to save in issuance fees to make retaining the cash beneficial for its investors is closest to:
A) $2.0 million
B) $5.5 million
C) $6.5 million
D) $7.0 million
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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EgorGruzdevEgorGruzdev
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More solutions for this book are available here
A
Explanation:  A) If the investors had invested the $200 million themselves: Net amount = investment × interest × (1 - ordinary tax rate) = $200 million × 5% × (1 - 30%) = $7.0 million

The amount if the corporation reinvests: Net amount = investment × interest × (1 - corporate tax rate)(1 - cap gains rate) = $200 million × 5% × (1 - 35%)(1 - 15%) = 5.525 million
Total savings then must be equal to   = $2.269 million in fees
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