Question: A firm has $20,000,000 of preferred shares outstanding that provide a dividend yield on par value of 12 percent and are callable at a premium of 5 percent. After-tax issuing and underwriting expenses on a similar new issue would amount to $350,000.

(a) To what level would market dividend yields (on comparable issues) have to drop to make refinancing attractive?

(b) Assume dividend yields have dropped to 9.5 percent. How many years will it take before the present value of future dividend savings exceeds initial refinancing costs (that is, before the firm breaks even on the investment)?

(c) With current dividend rates at 9.5 percent, what is the maximum number of new preferred shares the firm can issue without increasing aggregate annual dividend payments from their current level?

(d) Assume current dividend rates have dropped to 10 percent. What would be the market price of the outstanding preferred shares if they were non-redeemable?