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  3. in 2014, national utility issued $60,000,000 of 10

In 2014, National Utility issued $60,000,000 of 10%, 25-year bonds at par. The current market...

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Accounting

In 2014, National Utility issued $60,000,000 of 10%, 25-year bonds at par. The current market rate on bonds with the same rating is 8%. The bond contract will allow refunding of these bonds in 2019. Company officers have estimated the flotation costs (legal, printing, accounting, etc.) of a 20-year refunding bond issue to be $1,500,000. The underwriting costs on a best-efforts basis will be 3 percent of the issue price. The terms of the current bond contract require the payment of a 6% call premium. Short term money market rates are 6%, and a one-month overlap period is expected. Assuming that the utility firm's tax rate is 40%, would a decision to refund the outstanding bonds be acceptable?

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