Reference no: EM13842958

SITE REFERENCES AND SOURCES In this step of your professional challenge, you will write either a bond refunding or refinancing report. You will perform an analysis involving a bond refunding decision. Economic conditions often change; alternative financing vehicles become available and are feasible, or interest rates decrease to a point that refunding becomes viable. Both practical and strategic decisions must be weighed in terms of current potential for increasing profitability and whether refunding is really in the long-term best interest of the company. The process of refunding is very similar to a capital budgeting decision and considers the issues of call premium, tax savings related to flotation costs, and interest savings. Much like annual cash flows, interest payment savings are considered one key characteristic of the calculations.

Prepare a report (INCLUDING REFERENCES AND SOURCES) , not to exceed four pages, on the following refunding problem:

Mullet Technologies is considering whether or not to refund $75 million, 12% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12% 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 10% in today's market.

Neither they nor Mullet's management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase. A call premium of 12% 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 6 % annually during the interim period.

A. Perform a complete bond refunding analysis. What is the bond refunding's NPV?

B. What factors would influence Mullet's decision to refund now rather than later? Complete a SPREAD SHEET FOR THE BOND REFUNDING DECISION The spreadsheet template that you would use to complete the problem looks like the one on page 811.

Write a short memo after completing your calculations on whether the bond should be refunded and why. In addition, the report should indicate how these bond refunding steps could be applied to your chosen company.

Include responses to the following questions in your report:

1. Should the company refund the issuance? Provide a substantive rationale as to why the company should or should not proceed with the refunding process.

2. What critical factors should management take into account as it contemplates the refunding decision?

3. Assess how these bond refunding steps could be applied to your chosen company.

My choosen company is Babcock & Wilcox (B & W). PLEASE SITE SOURCES BELOW References 1. 2. 3.