What is the npv of the refunding for each bond

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Reference no: EM132073529

Question: Rex Inc. is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue will be used to repurchase one of the existing bond issues. The information about the two currently outstanding bond issues is:

	Bond A	Bond B
Coupon Rate	6%	7%
Value Outstanding	120,000,000	140,000,000
Call Premium	6.5%	7.5%
Transaction Costs of Refunding	11,000,000	13,000,000
Current YTM	5.5%	6.25%

The corporate tax rate is 30 percent. What is the NPV of the refunding for each bond? Which, if either, bond should the company refinance? Assume the call premium is tax deductible.

Reference no: EM132073529

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