Wayford Distributors has $40 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 3 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. 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.

Required: Advise Wayford Distributors whether or not they should refund the bond. Show all calculations (15 marks)

Answer rating: 100% (QA)

Analysis We need to compare the cost of refunding the bonds with the savings from issuing new bonds with a lower interest rate Cost of Refunding Call ... View the full answer