Southern Merchandising Inc $\bullet$ Southern's Tax Rate Is 25 $\bullet$ Southern Currently Has $4,000,000 in Shareholder Equity Prior to Any

Southern Merchandising Inc. is considering new financing to pay out $2,500,000 of existing 10% bonds payable at the beginning of the next fiscal year. The company wants to maximize ROE in the new year. They are considering two alternative ways of financing the payout:
1. Do not pay out existing bonds;
2. Issue a 5% bond payable at face value, or issue 250,000 common shares at $10.
Other information about Southern:
$\bullet$ Southern's tax rate is 25%.
$\bullet$ Southern currently has $4,000,000 in shareholder equity prior to any new share issue.
$\bullet$ Southern's average profit before financing costs and taxes is $800,000.
$\bullet$ A one-time penalty of $150,000 will be incurred to pay out the 10% bonds early, which is fully tax deductible.
Instructions
Calculate the following amounts for Southern, compare the two alternatives to the current bonds payable, and make a recommendation on refinancing, assuming the goal is to maximize return on equity for the next year.