Question: Margaret Kimberly, CFO of Charles River Associates, is considering whether or not to refinance the two currently outstanding corporate bonds of the firm. The first one is an 8 % perpetual bond with a $1000 face value with $75 million outstanding. The second one is a 9% perpetual bond with the same face value with $87.5 million outstanding. The call premiums for the two bonds are 8.5% and 9.5% of the face value, respectively. The transaction cost for refunding are $10 million and $12 million, respectively. The current interest rates for the two bonds are 7% and 7.25% respectively.
1. Which bond should Ms Kimberly recommend be refinanced?
2. What is the NPV of the refunding?