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Bond refunding

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Bond Refunding:

The BBB Corp. issued a 30-year bond 15 years ago with a coupon rate of 8.3% and flotation costs amounting to 4% of the principal amount of the issue, which was $25 million. They could refund the bond issue today, incurring a call premium of one year’s interest, and flotation costs of 6.5%, by issuing new bonds with a 15 year maturity. The coupon rate on the new bond issue would be 6.7%. Due to some uncertainty regarding the mechanics of the refunding, the old issue and the new issue will overlap for about 2 months, during which time the proceeds will be held in account earning 1.5% annually. If BBB has a marginal tax rate of 30%, should they go through with the refunding? Why or why not?

Reference no: EM131537761

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