In 2014, National Utility issued $60,000,000 of 10%, 25-year bonds at par. The current market rate on
bonds with the same rating is 8%. The bond contract will allow refunding of these bonds in 2019.
Company officers have estimated the flotation costs (legal, printing, accounting, etc.) of a 20-year
refunding bond issue to be $1,500,000. The underwriting costs on a best-efforts basis will be 3 percent
of the issue price. The terms of the current bond contract require the payment of a 6% call premium.
Short term money market rates are 6%, and a one-month overlap period is expected. Assuming that the
utility firm’s tax rate is 40%, would a decision to refund the outstanding bonds be acceptable?

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Yes a decision to refund the outsta... View the full answer