Mason Manufacturing is contemplating offering a new $60 million bond issue to replace an outstanding $60 million bond issue. The firm wishes to do this to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described below. The firm is in the 30 per cent tax bracket.

Old bonds. The outstanding bonds have a $1,000 par value and a 7.5 per cent coupon interest rate.

They were issued three years ago with a 15-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $345,000 in floatation costs. They are callable at $1,070.

New bonds. The new bonds would have a $1,000 par value, a 6 per cent coupon interest rate, and a 12-year maturity. They could be sold at their par value. The floatation cost of the new bonds would be $360,000. The firm expects to have two months of overlapping interest.

Required:

a. Calculate the initial investment that is required to call the old bonds & issue the new bonds.

b. Calculate the annual cashflow savings, if any, expected form the proposed bond refunding decision.

c. Would you recommend the proposed refunding? Why? Show your calculations clearly to explain your answer.