Dairy Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 10% and the interest rates on similar bonds have declined to 8%. The bonds have five years of their 20-year maturity remaining. The new bond will have a 5-year maturity. Dairy will pay a call premium of 5% and will incur new underwriting costs of $400,000 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. To analyze the refunding decision, use a 6% discount rate.
What is the present value of the cash outflows related to the call premium and underwriting cost?
Round to the nearest dollar and omit commas and dollar signs (example: $25,000 would be entered as 25000).
What is the present value of the cash inflows related to the refunding decision?
Round to the nearest dollar and omit commas and dollar signs (example: $25,000 would be entered as 25000).
Should Dairy Corp. refund the old bond issue and replace it with the new issue?