Bond Refunding. Jones Corporation is considering calling a $20 million, 30-year bond that was issued 10 years ago at a face interest rate of 14 percent. The call price on the bonds is 104. The bonds...

Bond Refunding. Jones Corporation is considering calling a $20 million, 30-year bond that was issued 10 years ago at a face interest rate of 14 percent. The call price on the bonds is 104. The bonds were initially sold at 97. The initial flotation cost was $200,000. The company is considering issuing $20 million, 12 percent, 20-year bonds in order to net proceeds and retire the old bonds. The new bonds will be issued at face value. The flotation costs for the new issue are $225,000. The tax rate is 46 percent. The after-tax cost of new debt ignoring flotation costs is 6.48 percent (12% 54%). With flotation costs, the after-tax cost of new debt is anticipated to be 7 percent. There is a 2-month overlap in which interest must be paid on the old bonds and new bonds. Should refunding take place?