United Brits Ltd. has a bond outstanding that carries a 10 percent coupon rate paid annually. Current bond yields are 7.5 percent. It has $30 million outstanding and 12 years left to maturity. A new issue would require $500,000 for flotation costs, and the existing issue has written off all its flotation expenses. An overlap period of one month would be anticipated, during which money market rates would be 2.5 percent. United Brits Ltd. has a tax rate of 30 percent. The call premium on the outstanding issue is currently at 10 percent. Assume the par value of the bonds is $1,000.

a-1. Compute the discount rate. (Round the final answer to 2 decimal places.)

Discount rate %

a-2. Calculate the present value of the total outflows. (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Enter the answers in whole dollars, not in millions. Round the final answer to the nearest whole dollar.)

Total outflows $

a-3. Calculate the present value of the total inflows. (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Enter the answers in whole dollars, not in millions. Round the final answer to the nearest whole dollar.)

Total inflows $

a-4. Calculate the net present value. (Do not round intermediate calculations. Enter the answers in whole dollars, not in millions. Round the final answer to the nearest whole dollar.)

Net present value $

a-5. Would refunding be justified?

• Yes

• No

b. Compute the price of a bond in the market, if there was no call provision. How does this compare to the call price? (Round the final answer to 2 decimal places.)

Price of a bond $