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Advise Great Paint Ltd on whether they should refund

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Question - Great Paint Ltd is considering whether to repay its old bonds with a new bond issue.

The old $35 million bonds carry a coupon rate of 8%, paid annually, and were issued 5 years ago with 20 years to maturity.

It has a call premium of 10% above par value.

Current long-term rates are 6% per annum and treasury bill rates are 4%.

Underwriting costs on the old issue amounted to $300,000 however due to increased broker fees underwriting cost on the new issue would amount to $550,000.

It is expected that there would be an overlap period of one month.

The company is in the 35% tax bracket.

Required - Advise Great Paint Ltd. on whether they should refund the issue and why.

Reference no: EM133094796

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