Q. Thompson Enterprises has 5,000,000 of bonds outstanding. Each bond has a maturity value of 1,000 an annual coupon of 12.0% also 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the industry must pay flotation costs of $10 per new refunding bond. Ignore tax considerations suppose which the organization's tax rate is Zero.
The industry's decision of whether to call the bonds depends critically on the present interest rate on newly issued bonds. Illustrate what is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?