Zipline Ltd is considering whether to repay its old bonds with a new bond issue.

The old $25 million bonds carry a coupon rate of 12%, paid annually, and were issued 8 years ago with 20 years to maturity.

It has a call premium of 6% above par value.

Current long-term rates are 8% per annum and treasury bill rates are 2%.

Underwriting costs on the old issue amounted to $300,000 however due to increased broker fees underwriting cost on the new issue would amount to $450,000.

It is expected that there would be an overlap period of one month.

The company is in the 40% tax bracket.

Required: Advise Zipline Ltd. on whether they should refund the issue and why. (15 marks)