Food-Galore, Inc., has a $10 million outstanding bond issue, carrying a 12% coupon interest rate with 20

Question:

Food-Galore, Inc., has a $10 million outstanding bond issue, carrying a 12% coupon interest rate with 20 years remaining to maturity. This issue was sold 5 years ago and can be called by the company at a premium of 7% over its par value. Currently new 20-year bonds can be floated at a coupon interest rate of 9%. To ensure the availability of funds to pay off the old debt, the new bonds would be sold one month before the old issue is called, so for one month interest would have to be paid on both issues. Flotation costs, comprising mainly issuing and underwriting expenses, for the new debt would be $150,000. Currently, short-term interest rates are at 10% per annum. Food-Galore's marginal tax rate is 35%. Based on discounted cash flow analysis, should refunding take place?

Discounted Cash Flows
What is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most... 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...