Mullet Technologies is considering whether or not to refund a $225 million, 12% coupon, 30-year bond...

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Mullet Technologies is considering whether or not to refund a$225 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 14% would be required to retire the old bonds, andflotation costs on the new issue would amount to $5 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.
a.Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.
b.What factors would influence Mullet's decision to refund nowrather than later?

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Answer Answer Step 1 Calculate Initial Investment Outlay The value of initial investment outlay is determined as below Call Premium on Old Issue Value of Old IssueCall Premium Rate1Tax Rate 22500000014140 18900000 New Flotation Cost 5000000 Tax Savings on Old Flotation Cost Old Flotation CostsRemaining MaturityOriginal MaturityTax Rate 900000030 53040 3000000 See Answer

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Mullet Technologies is considering whether or not to refund a$225 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 14% would be required to retire the old bonds, andflotation costs on the new issue would amount to $5 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.a.Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.b.What factors would influence Mullet's decision to refund nowrather than later?