A firm has $45,000,000 of preferred shares outstanding that have a yield of 10 percent on par and are callable at a 3 percent premium. New issues will cost $980,000 in issuing and underwriting expenses.
a. At what interest rates would the firm want to refinance?
b. If the dividend yield drops to 8 percent, how long will it take before the present value of the interest savings exceeds the cost of refinancing?