Charles River Associates is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue will be used to repurchase one of the existing bond issues. The information about the two currently outstanding bond issues is:

The corporate tax rate is 35 percent. What is the NPV of the refunding for each bond? Which, if either, bond should the company refinance? Assume the call premium is tax deductible.

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Bond A Bond B Coupon rate Value outstanding Call premium Transaction cost of refunding Current YTM 8.00% $125,000,000 $132,000,000 7,50% 8.50% 11,500,000 13,000,000 6.25% 71 0%