Question
Continental Inc. currently have $50 million in bonds which carry a coupon rate of 10%, paid annually. These bonds have a 5% call premium and
Continental Inc. currently have $50 million in bonds which carry a coupon rate of 10%, paid annually. These bonds have a 5% call premium and were issued 8 years ago, with 20 years to maturity. The interest rates have fallen to 8% and as a result, the company is considering refunding these bonds. The new bond issue would incur underwriting costs of $1.8 million and an overlap period of 2 months is anticipated. The company pays corporate taxes at 35% and short-term rates are currently 3%. Required: Advise Continental Inc. on whether they should refund their bonds, giving the reason for your recommendation.
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