Mars Construction (MC) is considering whether to refund a THB40 million, 11 percent semi-annual coupon, 30-year bond issue that was sold 5 years ago. It is amortizing THB2.4 million of flotation costs on the 11 semi-annual percent bonds over the 30-year life of that issue. MC's investment bankers have indicated the company could sell a new 25-year issue at an interest rate of 8 percent in today's market. Interests are paid twice a year. A call premium of 11 percent will be required to retire the old bonds, and flotation costs will amount to 4 percent of the new issue. MC's tax rate is 20 percent, and it uses a straight line method to amortize flotation costs. The new bonds will be issued at the same time the old bonds are called. The market interest rate for short-term investment is 2 percent per annum compounded semi-annually.
(1) Find the net present value of the refunding operation. Should the firm refund the bonds? Why or why not?
(2) Other things constant, what is the coupon rate (per year) on the new bonds that makes the firm indifferent between refunding and not refunding? (xx.xx%)