Question

Mullet Technologies is considering whether or not to refund a $75 million, 15% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $9 million of flotation costs on the 15% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 9% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 9% any time soon, but there is a chance that rates will increase.

A call premium of 7% would be required to retire the old bonds, and flotation costs on the new issue would amount to $7 million. Mullet's marginal federal-plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 4% annually during the interim period.

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

   $ ____________

2. What factors would influence Mullet's decision to refund now rather than later? 150 words minimum.

Answer 1

AShat in dhe complhte bone shundig analyshs Conduc a NPV? To cudund he okd Bue nvekment outlay oregeined odeall prermiu n (1 5million 40% 15 7. x 75000,000 x o.15 X O 60 6450000 Nlees loatatioo corf milion 9000,000 ofd loataion tax sauing 25x0.40 millian X 9000, 0O0 X o.8333 X O 40 3000,000 old ue additional ntees for mornth - $75wilion x o - 75000,000 x0.0833x 0/5X O.60

NO Q =-$ 56 3500 I month fnm nvetmert for Poferert caned C1-40 75000000 x O 04 X0 083333 X 0'60 $ 150000 -560500t 15000 0 G750000+3000000 416500 Hoatation conf annual tax Amoigaion 4q million40 5 144000 Amortzation ofd oatsation dnaual tu &eneblaf X 30 qроо.0ос х о40 3 O 0000

NO(3 floatation cot net annual tan On amortizatin neus Sawings 44 O00 4 4000 armorhigation f hesunt valueneb annual tax auings n a чФ0 х РИIFA -25 0to 054) 4000 X 0 054 4000 x 13.5458333 3a5100 old bond annal nteresf 000,000 x 15 K (1-40%) 750001000 XOIS xo.6 G750coo Neus bond annual tenef oh-) 4050000

NO Pege ntores auings 6750000 Nes annual abfe ta 4050000 O0000t Fntexta sangs 00000 X net anneual abfoi tha fo. Pv PVIFE(S 1- Cito.as) 2700000 X Q00000 X 13.545833 3 365735O orehunding deciaion NP V 416250O 395100 +36573750 30736350 of ceduendting deaision 3a136350 '. NPV Aghat fachor culd inluence Halleth decisian to retund nocs oatho han laten Caming ca hecinates regonding Parerent rates be onsidered should

NO Waiting prefee,f interef des all docen expechol immadiale onbonding prebered na oes expected incorease to mportan to Contickn dhe meadion o nvesfor to wands calling off he he Calling the ofd bonds may abfect the ulne nancing dinappoint e vfora f ihene ane athi OnAmall roups of invesfors he callirg f bonds aster poodofme , dhere anc chances ha bonds may be otcalled by oveator in ckaneae in teresf oates Case