Question
ABC Corporation has a $20 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest
ABC Corporation has a $20 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 25 years and have 20 years remaining. The new issue would be for 20 years. There is an 6 percent call premium on the old issue. The underwriting cost on the new $20,000,000 issue is $550,000, and the underwriting cost on the old issue was $300,000. The company is in a 34 percent tax bracket, and it will use a 7 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision. Find the underwriting cost of the old issue.
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