Question

Refunding analysis

Mullet technologies is considering whether there or not to refund a 50,000,000,13% coupon 30 year bond issued that was sold five years ago. Its amortizing 3 million of flotation costs on the 13%bonds over the issue 30 year life. Mullets investment banks have indicated that the company could sell a new 25 year issue an interest rate of 10% in today’s market. Neither they nor mullets management anticipate the interest rates will fall below 10% anytime soon, but there is a chance that they will increase.

A call premium of 9% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4 million. Mullets marginal federal plus state tax rate is 40%. The new bonds would be issued one 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 to the nearest cent.

What factors would influence Mullets decision to refund now than later?

Answer 1