North Star Company is considering whether or not to refund a $115 million, 5.75% coupon, 25-year bond issue that was sold 9 years ago. It is amortizing $5.5 million of flotation costs on the 5.75% bonds over the issue's 25-year life. Star's investment bankers have indicated that the company could sell a new 16-year issue at an interest rate of 4% in today's market. Neither they nor Star's management anticipate that interest rates will fall below 4% any time soon, but there is a chance that interest rates will increase A call premium of 5% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4.6 million. Star's marginal federal-plus-state tax rate is 40 percent Current bond issue data Par value 115,000,000 Coupon rate 5.7500% original maturity 25 Remaining maturity 16 original flotation costs 5,500,000 Call premium 5.0000% Tax rate 40% Refunding data. 4.0000% Coupon rate Maturity 16 4,600,000 Flotation costs
a. Perform a complete bond refunding analysis.
b. What is the bond refunding's NPV?