DCH Ltd. has had several years of success and has greatly improved their financial position. As the new Director of Finance, you are considering refinancing existing bonds with a new issue.

You note in particular a bond issue that has the following details:

Maturity value of bond issue $56,000,000

Time to maturity (in years) 9

Time since initial bond issue (in years) 8

Annual coupon rate on existing bond 10.5%

Call Premium

No call allowed during the first 5 years

Starting call premium in year 6 13%

Call premium declines by 0.5% per year staring in year 7

Current long-term interest rates on similar bonds 8.5%

Current short-term interest rates 6%

Overlap period (in months) 1

Corporate tax rate 34%

Underwriting and other issue costs $1,200,000

REQUIRED:

Should the old issue be refunded and replaced with a debt issue with a comparable maturity and a coupon rate equal to that currently in effect on similar bonds? Show your calculations.