Net advantage of refunding

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(Net advantage of refunding) RST, Inc.has a $50 million debt issue outstanding that bears a 15% coupon (7.5% semiannual rate). It matures in a lump sum at the end of 10 years. The call price is $1,100 per bond. A new 10-year debt issue would require a 12.5% coupon (6.25% semiannual). The firm's marginal income tax rate is 40%.

a. Calculate the semiannual after-tax savings that would result if the firm issued $50 mil- lion of 12.5% debt.

b. Calculate the net advantage of refunding the 15% debt issue.

Reference no: EM132409624

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