Refunding Analysis
Mullet Technologies is considering whether or not to refund a$50 million, 15% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $3 million of flotation costs on the 15%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 15% would be required to retire the old bonds,and flotation costs on the new issue would amount to $6 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.
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Conduct a complete bond refunding analysis. What is the bondrefunding's NPV? Do not round intermediate calculations. Round youranswer to the nearest cent.
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What factors would influence Mullet's decision to refund nowrather than later?
Refunding Analysis
Mullet Technologies is considering whether or not to refund a$50 million, 15% coupon, 30-year bond issue that was sold 5 yearsago. It is amortizing $3 million of flotation costs on the 15%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 15% would be required to retire the old bonds,and flotation costs on the new issue would amount to $6 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?
