$($LO$16-2$ & $16-3)$

Barton Simpson, the chief financial officer of Broadband Inc., could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A$2-$rated bonds was now $6$ percent. The $$30$ million, $15-$year bond issue that his firm has outstanding was initially istied at $9$ percent $5$ years ago.

Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of $8$ percent. The underwriting cost on the old issue had been $3$ percent of par, and on the new issue it would be $5$ percent of par. The tax rate would be $30$ percent, and a $4$ percent discount rate would be applied for the refunding decision. The new bond would have a $10$ year life.

Before Barton used the $8$ percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

a$.$ First, compute the price of the old bonds in the open market. Use the valuation procedures for a bond that were discussed in Chapter $10($use annual analysis$).$ Determine the price of a single $$1,000$ par value bond.

b$.$ Compare the price in part a to the $8$ percent call premium over par value. Which appears to be more attractive in terms of reacquiring the old bonds?

c$.$ Now do the standard bond refunding analysis as discussed in this chapter. Is the refunding financially feasible?

d$.$ In terms of the refunding decision, how should Barton be influenced if he thinks interest rates might go down even more?