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"Mullet technologies is considering whether or not to refund a $75 million dollar, 12% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $5 million of floatation 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 the interest rates will fall below 10% anytime soon but theres 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. Mullets 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 shorty-term government securities 6% annually during the interim period.

A.perform a complet bond refund analysis. What is the bond refunding's NPV?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M946944

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