What is the bond refunding npv

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Mullet Technologies is considering whether or not to refund a $100 million, 15% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $6 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 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.

A call premium of 13% would be required to retire the old bonds, and flotation costs on the new issue would amount to $7 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.

  1. What is the bond refunding's NPV?

Reference no: EM132288878

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