Advise downsview inc. on whether they should refund

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Reference no: EM133328123

Question: Downsview Inc. currently have $60 million in bonds which carry a coupon rate of 12%, paid annually. These bonds have a 4% call premium and were issued 15 years ago, with 30 years to maturity. The interest rates have fallen to 9% and as a result, the company is considering refunding these bonds. The new bond issue would incur underwriting costs of $1.2 and an overlap period of 2 months is anticipated. The company pays corporate taxes at 30%, and short-term rates are currently 4%.

Required: Advise Downsview Inc. on whether they should refund their bonds giving the reason for your recommendation.

Reference no: EM133328123

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