Question
Karmart Ltd is considering whether to repay its old bonds with a new bond issue. The old $30 million bonds carry a coupon rate of
Karmart Ltd is considering whether to repay its old bonds with a new bond issue. The old $30 million bonds carry a coupon rate of 10%, paid annually, and were issued 6 years ago with 18 years to maturity. It has a call premium of 8% above par value. Current long-term rates are 7.5% per annum and treasury bill rates are 3%. Underwriting costs on the old issue amounted to $400,000 however due to increased broker fees underwriting cost on the new issue would amount to $500,000. It is expected that there would be an overlap period of one month.
The company is in the 30% tax bracket.
Required: Advise Karmart Ltd. on whether they should refund the issue and why
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