Leo Manufacturing has $50 million in bonds outstanding that carry a 12 percent coupon rate paid annually. These bonds have 10 years to maturity and a call premium of 2.5 percent. As the yield on current bonds is 10 percent the company is considering refunding their bonds. A new issue would require $1.5 million in underwriting costs as well as $500,000 in other deductible expenses. In addition, an overlap period of one month is anticipated, during which time money market rates would be 8 percent. The company's tax rate is 40 percent. Advise Leo Manufacturing whether or not they should refund the bond. Show all calculations.

Answer rating: 100% (QA)

To determine whether Leo Manufacturing should refund the bond we need to compare the cost of refundi... View the full answer