Question

Problem 18-07 Refunding Analysis Mullet Technologies is considering whether or not to refund a $75 million, 14% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $6 million of flotation costs on the 14% 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 $5 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 5% annually during the interim period. 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. $   ---------------------- What factors would influence Mullet's decision to refund now rather than later? -----------------------------

Answer 1

a.  the bond refunding's NPV is $25,223,875.27.

b. interest rate increase will influence the decision of bond refunding. if interest rates increase to or more than 13% then Mullet needs to make decision to refund later because NPV of refunding will be negative if interest rate is 13% or more.