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eBook Problem 18-07 Refunding Analysis Mullet Technologies is considering whether or not to refund a $250 million, 12% coupon,...

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Finance

eBook

Problem 18-07
Refunding Analysis

Mullet Technologies is considering whether or not to refund a$250 million, 12% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $6 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 call premium of 15% would be required to retire the old bonds,and flotation costs on the new issue would amount to $4 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 4% annually during the interim period.

  1. Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.

    $  

  2. What factors would influence Mullet's decision to refund nowrather than later?

Answer & Explanation Solved by verified expert
3.8 Ratings (618 Votes)
What is the bond refundings NPV Calculation of initial outlay million a Face value 250 AddCall premium 15 375 Cost of calling old bonds 2875 b Overlapping Interest cost for one month Note1 Before Tax 012112250 25 Less Tax 40 1 15 c Interest from Govt Securities 2504112 083 d Gross proceed of new issue 250 Less Issue costs 4    See Answer
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