eBook Problem 18-07 Refunding Analysis Mullet Technologies is considering whether or not to refund a $100 million, 13% coupon,...

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Problem 18-07
Refunding Analysis
Mullet Technologies is considering whether or not to refund a$100 million, 13% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $6 million of flotation costs on the 13%bonds over the issue's 30-year life. Mullet's investment banks haveindicated that the company could sell a new 25-year issue at aninterest rate of 10% in today's market. Neither they nor Mullet'smanagement anticipate that interest rates will fall below 10% anytime soon, but there is a chance that rates will increase.
A call premium of 14% would be required to retire the old bonds,and flotation costs on the new issue would amount to $4 million.Mullet's marginal federal-plus-state tax rate is 40%. The new bondswould be issued 1 month before the old bonds are called, with theproceeds being invested in short-term government securitiesreturning 5% annually during the interim period.
Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.
$
What factors would influence Mullet's decision to refund nowrather than later?

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a NPV of BondRefunding DecisionStep 1 Calculationof Initial Investment Y or After Tax Refunding investmentexpenditurePARTICULARSAMOUNTRefund of Old Bonds 150000000 110165000000Less Net Proceeds From New Bond Issue 150000000 4000000146000000Less Tax Shield on Call Premium 40 OF 15000006000000Less Tax shield on Unamortized See Answer

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eBookProblem 18-07Refunding AnalysisMullet Technologies is considering whether or not to refund a$100 million, 13% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $6 million of flotation costs on the 13%bonds over the issue's 30-year life. Mullet's investment banks haveindicated that the company could sell a new 25-year issue at aninterest rate of 10% in today's market. Neither they nor Mullet'smanagement anticipate that interest rates will fall below 10% anytime soon, but there is a chance that rates will increase.A call premium of 14% would be required to retire the old bonds,and flotation costs on the new issue would amount to $4 million.Mullet's marginal federal-plus-state tax rate is 40%. The new bondswould be issued 1 month before the old bonds are called, with theproceeds being invested in short-term government securitiesreturning 5% annually during the interim period.Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.$ What factors would influence Mullet's decision to refund nowrather than later?