Final answer:
Badger Boats should consider issuing bonds with a call feature if they anticipate a decrease in interest rates, as this allows them to refinance the debt at a lower cost. An increasing rate environment would not favor callable bonds, whereas a flat rate environment would require other considerations for decision-making.
Step-by-step explanation:
If Badger Boats is looking to issue $18 million of corporate bonds, the decision to include a call feature depends on the anticipated interest rate environment. In an environment where interest rates are expected to decrease, it would be wise to issue bonds with a call feature. This is because, as rates decrease, the company can call the existing bonds and reissue them at a lower interest rate, reducing their cost of borrowing. Conversely, if the company anticipates an increasing rate environment, they might avoid issuing callable bonds since they would be less likely to benefit from calling the bonds and refinancing at higher rates. If rates are expected to remain flat, the decision to include a call feature would rely on other strategic financing considerations.
For instance, while evaluating the issuance of callable bonds, if Badger Boats predicts a decrease in rates from, say, 5% to 3.5%, their existing bond payments at a possibly higher fixed rate (e.g., 5%) could be replaced with new bonds at the lower rate (3.5%), saving on interest expenses. Similarly, if the interest rate environment were to increase, the company would be at a disadvantage with callable bonds as they would be stuck paying higher interest rates on the new bonds.