Refunding Analysis Mullet Technologies is considering whether or not to refund a $125 million, 13% coupon,...

80.2K

Verified Solution

Question

Finance

Refunding Analysis Mullet Technologies is considering whether ornot to refund a $125 million, 13% coupon, 30-year bond issue thatwas sold 5 years ago. It is amortizing $6 million of flotationcosts on the 13% bonds over the issue's 30-year life. Mullet'sinvestment banks have indicated that the company could sell a new25-year issue at an interest rate of 11% in today's market. Neitherthey nor Mullet's management anticipate that interest rates willfall below 11% any time soon, but there is a chance that rates willincrease. A call premium of 9% would be required to retire the oldbonds, and flotation costs on the new issue would amount to $3million. Mullet's marginal federal-plus-state tax rate is 40%. Thenew bonds would be issued 1 month before the old bonds are called,with the proceeds being invested in short-term governmentsecurities returning 6% 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.
I need an answer. There was not an answer given when i postedthe question yesterday just a bunch of different numbers.Thanks.

Answer & Explanation Solved by verified expert

3.6 Ratings (604 Votes)

Given data Existing bond issue 125000000 New bond issue 125000000 Flotation cost 6000000 Flotation cost 3000000 Maturity of the original debt years 30 Maturity years 25 Years since issue 5 New cost of debt 11 Call premium 9 Aftertax cost of debt 66 Original coupon rate 13 Tax rate 40 Shortterm interest rate 6 Step 1 Initial cash flow schedule Column Formula Beforetax Aftertax A Call premium existing bond issuecall premium Aftertax beforetax1tax rate Call premium on the old bond 11250000 6750000 B It cannot be expensed immediately so See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Refunding Analysis Mullet Technologies is considering whether ornot to refund a $125 million, 13% coupon, 30-year bond issue thatwas sold 5 years ago. It is amortizing $6 million of flotationcosts on the 13% bonds over the issue's 30-year life. Mullet'sinvestment banks have indicated that the company could sell a new25-year issue at an interest rate of 11% in today's market. Neitherthey nor Mullet's management anticipate that interest rates willfall below 11% any time soon, but there is a chance that rates willincrease. A call premium of 9% would be required to retire the oldbonds, and flotation costs on the new issue would amount to $3million. Mullet's marginal federal-plus-state tax rate is 40%. Thenew bonds would be issued 1 month before the old bonds are called,with the proceeds being invested in short-term governmentsecurities returning 6% 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.I need an answer. There was not an answer given when i postedthe question yesterday just a bunch of different numbers.Thanks.