Delta Corporation has $20 mil bond obligation outstanding, which is considering refunding.
Through the bonds were initially issued at 13% the interest rates on similar issues have declined to 11.5%.
The bonds were originally issued for 20 years and have 16 years remaining.
The new issue would be for 16 years.
There is a 9% call premium on the old issue.
The underwriting cost on the new $20 mil issue is $560,000 and the underwriting cost of the old issue is $400,000.
The company is in a 40% tax bracket, and it will use a 7% discount rate (rounded after tax cost of debt) to analyze the refunding decision.
Should the old issue be refunded with new debt?
The solution explains how to evaluate a bond refunding decision.