1. Windsor, Inc. has a $10 million outstanding bond issue, carrying a 12% coupon interest rate with 20 years remaining to maturity. This issue was sold 5 years ago and can be called by the company at a premium of 7% over its par value. Currently, new 20-year bonds can be floated at a coupon interest rate of 9%. Flotation costs for the new debt would be $150,000 and can be amortized over five years. Currently, short-term interest rates are at 10% per annum. Windsors marginal tax rate is 35%.

1. Should the firm refund the bond issue?
2. To ensure the availability of funds to pay off the old debt, the new bonds would be sold one month before the old issue is called, so for one month, interest would have to be paid on both issues. In this case, what is the NPV of the proposed refunding?