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?
