Worldwide Widget Manufacturing, Inc

Subject:FinancePrice: Bought3

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Worldwide Widget Manufacturing, Inc., is doing so well it decided to go ahead with its plan to expand. It issued $30 million in debt due in 30 years to finance the expansion at an 8 percent coupon rate. The company makes interest-only, semiannual payments of $1,200,000 on this debt. Debt issued today would cost only 7 percent interest. You have been asked to determine whether the company should issue new debt (for 25 years) to pay off the old debt. If the company does so, it will have to pay $1.7 million as a “call Premium” to the existing debt holders, and also $1.4 million to its investment bankers to float the issue. If the new debt was issued, what would be the semiannual interest payments savings or cost? What is the cost to refinance the debt? What would be the present value of the semiannual savings in interest payments over the life of the debt? Should you advise the company to replace the old debt with the new debt? Why?