Margret Kimberly, CFO of Georgia Strait Associates, is considering whether or not to refund the two currently outstanding corporate bonds of the firm. The first one is a 7 percent perpetual bond with a $1,000 face value with $125 million outstanding. The second one is an 8 percent perpetual bond with the same face value with $132 million outstanding. The call premiums for the two bonds are 7.5 percent and 8.5 percent of the face value, respectively. The transaction costs of the refunding are $11.5 million and $13 million, respectively. The current interest rates for the two bonds are 6.25 percent and 7.1 percent, respectively. The tax rate is 35 percent. Which, if either, bond should Margret recommend be refunded? What is the NPV of the refunding?
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