Should old issue be refunded and replaced with a debt issue

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Reference no: EM132792224

Question - Dewey, Cheetham, and Howe Ltd. has had several successful years and greatly improved their financial position. As the new vice-president of finance, you are considering refinancing existing bonds with a new issue.

You note in particular a bond issue that has the following details:

Maturity value of bond is $ 57,000,000

Time to maturity (in years) 9

Time since initial bond issue (in years) 6

Annual coupon rate on existing bond 11.0%

Call Premium

No call allowed during the first 5 years

Starting call premium in year 6 11%

Call premium declines by 0.5% per year staring in year 7

Current long-term interest rates on similar bonds 9.000%

Current short-term interest rates 4.0%

Overlap period (in months) 1

Corporate tax rate 32%

Underwriting and other issue costs $ 900,000

Required - Should the old issue be refunded and replaced with a debt issue with a comparable maturity and a coupon rate equal to that currently in effect on similar bonds? Show your calculations.

Reference no: EM132792224

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