DFW Associates (DFWA) is considering whether to refund its 10,000 bonds outstanding with:

? $1,000 par value

? 5 years since original

? 6% coupon

? 15-year term-to-maturity

*Note: DFWA amortizes its Floatation costs of $350,000(from original issue) over the 15-year life.

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DFWA's investment bankers have indicated that the company could issue 10,000 new bonds with:

- $1,000 face value

- 10-year term-to-maturity

- 4.25% yield

*Note: The new issue would carry a Floatation cost of $300,000.

*Given: DFWA's Marginal Tax Rate is 40%.

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DWFA's plan to retire outstanding & issue new bonds:

? Call Premium of 10% required in order to retire the outstanding bonds.

? New bond issues would also require a Call Premium of 10%.

*Assume: The old bonds are retired as soon as the new bonds are issued.

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Solve the following:

1. What is the NPV of the proposed refunding?

2. What do you recommend DFWA do and why?