1. The Harding Corporation has $50 million of bonds outstanding that were issued at a coupon rate of 10.25 percent seven years ago. Interest rates have fallen to 9 percent. Preston Alter, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Preston would like to refund the bonds with a new issue of equal amount also having 18 years maturity. The Harding Corporation has a tax rate of 25 percent. The underwriting cost on the old issue was 2.5 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with an 8 percent call premium starting in the sixth year and schedule to decline by one-half percent each year thereafter (consider the bond to be seven years old for purposes of computing the premium). Should the Harding Corporation refund the old issue?
2. In the previous problem, what would be the aftertax cost of the call premium at the end of year 13 (in dollar value)?