Mullet Technologies is considering whether or not to refund a $150 million, 12% coupon, 30-year bond...

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Mullet Technologies is considering whether or not to refund a$150 million, 12% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $9 million of flotation costs on the 12%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 callpremium of 8% would be required to retire the old bonds, andflotation costs on the new issue would amount to $6 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 completebond refunding analysis.
a)What is the bond refunding's NPV? Do not round intermediatecalculations. Round your answer to the nearest cent.
b) What factors would influence Mullet's decision to refund nowrather than later?

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4.5 Ratings (702 Votes)

The initial investmentoutlay to refund the old issue aftertax call premium onold issue new flotation cost tax savings from old flotationcosts additional interest on old issue after tax interestearned on investments in interim periodaftertax call premium on old issue par value of old issue call See Answer

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