Should the firm refund its existing debt

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Reference no: EM13181339

Skyline Acres of Ningbo is considering the refunding of its present $40,000,000 issue of outstanding bonds. The bonds, which were issued 5 years ago, with a coupon rate of 11%, have a remaining term to maturity of 15 years but can be called at face value with a premium of 1 year's interest. The floatation costs of the original issue were $600,000. The government allows floatation costs as business expenses so these costs were amortized over five years. The bonds will be replaced with $40,000,000 of 8.5% coupon rate bonds, which will be issued at par. The floatation costs of these new bonds, which will mature in 15 years, are expected to be $775,000. It is assumed that floatation costs will affect the proceeds from the issue. To ensure that funds will be available when needed, there will be a three month overlap period, and net proceeds from the new issue will be invested at 5% in the money market. Skyline's tax rate is 30%. Should the firm refund its existing debt?

Reference no: EM13181339

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