Dairy Corp. has a $20 million bond obligation outstanding which it is considering refunding. The bonds were issued at 8% and the interest rates on similar bonds have declined to 6%. The bonds have five years of their 20-year maturity remaining. The new bond will have a 5-year maturity. Dairy will pay a call premium of 5% and will incur new underwriting costs of $400,000 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. To analyze the refunding decision, use a 5% discount rate. Should the old issue be refunded?

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The Answer of Dairy Corp. has a $20 million bond obligation outstanding which it is considering refunding. The bonds were issued at 8% and the interest rates on similar bonds have declined to 6%. The bonds have five years of their 20-year maturity remaining. The new bond will have a 5-year maturity. Dairy will pay a call premium of 5% and will incur new underwriting costs of $400,000 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. To analyze the refunding decision, use a 5% discount rate. Should the old issue be refunded?