Downsview Inc. currently have $60 million in bonds which carry a coupon rate of 12%, paid annually. These bonds have a 4% call premium and were issued 15 years ago, with 30 years to maturity.The interest rates have fallen to 9% and as a result, the company is considering refunding these bonds. The new bond issue would incur underwriting costs of $1.2 and an overlap period of 2 months is anticipated.The company pays corporate taxes at 30%, and  short-term rates are currently 4%?

Required:  Advise Downsview Inc. on whether they should refund their bonds giving the reason for your recommendation

Answer rating: 100% (QA)

Given the information provided it is advisable for Downsview Inc to refund their bonds Refunding their bonds would allow the company to benefit from the current lower interest rates resulting in a lower cost of debt This could potentially result in a lower overall cost of capital for the company The current coupon rate of 12 is higher than the current market interest rate of 9 and hence refunding the ... View the full answer