Clements Corp. is considering refinancing its current $20 million bond obligation. The bonds were initially issued at 16%, yet current rates on similar bonds have fallen to 13.3%. The bonds were originally issued for 20 years and have 16 years remaining. The new issue would be for 16 years. There is a 9% call premium on the old issue.

The underwriting cost on the new $20 million issue is $550,000, and the underwriting cost on the old issue was $400,000. The company is in a 40% tax bracket, and it will allow an overlap period of one month (1/12 of the year). Treasury bills currently yield 5%.

As a financial analyst at Clements, you have been tasked to recommend if the bonds should be refinanced.

Please show ALL work

a) (1 mark) What is the after-tax discount rate that should be used in your calculations?

b) (1 mark) What is the call premium that the company would need to pay?

c) (2 marks) What is the tax savings per year attributable to the underwriting costs?

d) (1 mark) What is the present value of the borrowing expenses of the new issue?

e) (2 marks) What is the cost attributable to the duplicate interest expense?

f) (2 marks) What is the after-tax net interest expense savings?

g) (1 mark) What is the present value of the net savings if the bonds were refinanced?