AG Corp. has a $10,000,000 perpetual bond issue outstanding, with annual interest payments at 12%. The issue

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AG Corp. has a $10,000,000 perpetual bond issue outstanding, with annual interest payments at 12%. The issue is callable now with a call premium equal to one year’s interest. AG would issue a new $10,000,000 preferred shares with $50 Par value, 2 months prior to calling the outstanding issue. During the overlap period, extra funds from the new issue can be invested in 3-month securities at a rate of 4.25%. It would cost $750,000 to float a new preferred share issue. The new issue would pay only $1.00 per share per quarter in dividends. Assume a 40% corporate tax rate.

Should AG pursue the bond refinancing opportunity? Explain your reasoning and provide supporting calculations.