In: Finance
Refunding Analysis 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 $3 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 $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 7% 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?