Skyline Acres Inn is considering the refunding of its present $40,000,000 issue of outstanding bonds. The bonds,
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Question:
The floatation costs of the original issue were $600,000. These costs were amortized over five years? The bonds will be replaced with $40,000,000 of 8.5% coupon rate bonds, which will be issued at par. The floatation costs of these new bonds, which will mature in 15 years, are expected to be $775,000. To ensure that funds will be available when needed, there will be a one-month overlap, and net proceeds from the new issue will be invested at 5%. Skyline's tax rate is 30%. Should the firm refund its existing debt?
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