E-Books.com currently has a 10-year $1 million bond issue outstanding (5 years remaining to maturity) with an

Question:

E-Books.com currently has a 10-year $1 million bond issue outstanding (5 years remaining to maturity) with an 11% coupon interest rate and a $1,000 par value. The call premium on these bonds is 5%. Because of a decline in interest rates, the firm would be able to refund the issue with a $1 million issue of 9% 5-year bonds. The flotation costs for refunding the issue are $25,000. The new bonds will have to be issued one month before the old bonds are called. The present return on short-term government securities is 5% annually. E-books has a marginal tax rate of 25%. Assume that there are no other costs associated with refunding. Should the firm refund the bond issue?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...