What factors would influence mullets decision to refund now

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Reference no: EM132496366

Refunding Analysis

Point 1: Mullet Technologies is considering whether or not to refund a $200 million, 12% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $9 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 11% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 11% any time soon, but there is a chance that rates will increase.

Point 2: A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 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 4% annually during the interim period.

Question a. 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.

Question b. What factors would influence Mullet's decision to refund now rather than later? (Explain)

Reference no: EM132496366

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