Reference no: EM133175078

Question - The Harding Corporation has $51.4 million of bonds outstanding that were issued at a coupon rate of 10.25 percent seven years ago. Interest rates have fallen to 9 percent. Preston Alter, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Preston would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Harding Corporation has a tax rate of 22.5 percent. The underwriting cost on the old issue was 3.9 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with an 8 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter (Consider the bond to be seven years old for purposes of computing the premium).

Required -

a. Compute the discount rate.

b. Calculate the present value of total outflows.

c. Calculate the present value of total inflows.

d. Calculate the net present value.

e. Should the Harding Corporation refund the old issue?