Refunding analysis and find NPV of the refunding

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Reference no: EM13917634

A firm is considering the refunding of a $60 million, 16% coupon, 30- year bond issue that was sold 5 years ago; there were $3 million in flotation costs. The firm's investment bank has indicated that the firm could sell a new 25-year issue at 13%. A call premium of 16% would be required to retire the old bonds and flotation costs on the new issue would be $3 million. The new bonds would be issued 1 month before the old bonds were called with the proceeds being invested in short-term government securities earning 10% annually during the interim period. The firm's tax rate is 40%. Perform a refunding analysis and find the NPV of the refunding. Should the firm refund? Why or why not?

Reference no: EM13917634

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