What is the cost of refunding the debt

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Reference no: EM132030767

The company has a $300 million debt, with an annual coupon rate of 14% and a remaining life of 10 years. The indenture allows redemption at the call premium of 5%. Suppose the firm can issue a new debt of $250 million with the coupon rate of 11.5%. Flotation cost of the new bond issue is $2.75 million. There is two months overlap, and Pygmalion’s tax rate is 36%, cost of capital is 20% and the T-bill rate is 9%.

What is the cost of refunding the debt?

What is the benefit of refunding the debt?

Should the company refund the debt?

Reference no: EM132030767

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