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    Calculating the refunding of bonds

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    The Bowman Corporation has $20 million bond obligation outstanding, which is considering refunding. Though the bonds were issued at 12 percent, the interest rates on similar issues have declined to 10.5 percent. The bonds were originally issued for 20 years remaining. The new issue would be for 15 years. There is an 8 percent call premium on the old issue. The underwriting cost on the new $20,000,000 issue is $570,000 and the underwriting cost on the old iss was $400,000. The company is in a 35 percent tax bracket, and it will us a 7 percent discount rate to analyze the refunding decision. Should the old issue be refunded with new debt?

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    Solution Summary

    This solution decides whether or not an old issue should be refunded with new debt given the interest rate, premium and underwriting cost.