The Bowman Corporation has a $20 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 12 percent, the interest rates on similar issues have declined to 10.5 percent. The bonds were originally issued for 20 years and have 15 years remaining. The new issue would be for 15 years. There is an 8 percent call premium on the old issue. The underwriting cost on the new $20,000 issue is $570,000, and the underwriting cost on the old issue was $400,000. The company is in a 35 percent bracket, and it will use a 7 percent discount rate (rounded after tax cost of debt) to analyze the refunding decision. Should the old issue be refunded with new debt?
Click here for the solution: The Bowman Corporation has a $20 million bond obligation outstanding, which it is considering refunding
