Interest rates have fallen since your company issued 20 year 9% coupon bonds six years ago to raise 12000000 of needed capital. Those bonds are now callable at the current market price and you are considering exercising the call provision.

Q1: If you wish to reduce your interest expense by calling the bonds, how much will you need to pay for each bond if bonds of similar risk to yours are yielding 5% in the market today?

Q2:Assume you purchased all the outstanding bonds at the price determined in part 1 above. You are considering retiring the debt with an issue of preferred stock which would require a 6% rate of return to attract investors. If you issued preferred shares at $100 par, how many preferred shares would you need to issue to cover the repurchase of the 9% coupon bonds from part 1 above?

Q3:If instead of issuing the preferred share from part 2, you simply replaced the 9% bonds with new 5% bonds, what would be the annual savings in interest cost for your company?