Mullet Technologies is considering whether or not to refund a $75 million, 12% coupon, 30-year bond...

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Mullet Technologies is considering whether or not to refund a$75 million, 12% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $5 millions 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. A call premium of 12% wouldbe required to retire the old bonds, and flotation costs on the newissue would amount to $5 million. Mullet’s marginal tax rate is40%.
a. What is the cash outlay at the time of the refunding?
b. What is the net change in the annual flotation cost taxsavings?
c. What is the after-tax annual interest savings?
d. What is the bond refunding’s NPV? What is the decision?

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4.1 Ratings (814 Votes)

a In order to calculate the cash outlay for refunding let us calculate the following step by step Firstly let us calculate the call premium on old issue Given 12 coupon rate 75 million of refunding 40 tax rate Call premium 75000000 X 012 X 104 5400000 New See Answer

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