Mullet Technologies is considering whether or not to refund a$225 million, 14% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $9 million of flotation costs on the 14%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 9% in today's market. Neither they nor Mullet'smanagement anticipate that interest rates will fall below 9% anytime soon, but there is a chance that rates will increase.
A call premium of 11% would be required to retire the old bonds,and flotation costs on the new issue would amount to $3 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 7% annually during the interim period.
Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.
What factors would influence Mullet's decision to refund nowrather than later?
