The Robinson Corporation has $27 million of bonds outstanding
that were issued at a coupon rate of 10.950 percent seven years
ago. Interest rates have fallen to 10.250 percent. Mr. Brooks, the
Vice-President of , does not expect rates to fall any
further. The bonds have 17 years left to maturity, and Mr. Brooks
would like to refund the bonds with a new issue of equal amount
also having 17 years to maturity. The Robinson Corporation has a
tax rate of 30 percent. The underwriting cost on the old issue was
2.70 percent of the total bond value. The underwriting cost on the
new issue will be 1.80 percent of the total bond value. The
original bond indenture contained a five-year protection against a
call, with a 6 percent call premium starting in the sixth year and
scheduled to decline by one-half percent each year thereafter.
(Consider the bond to be seven years old for purposes of computing
the premium.) Calculate your final answer using the formula and
financial calculator methods. Assume the discount rate is equal to
the aftertax cost of new debt rounded up to the nearest whole
percent (e.g. 4.06 percent should be rounded up to 5 percent).
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