Mullet technologies whether or not to refund a $75 million, 12 % coupon, 30-year bond issue that was sold 5 years ago. It is amortization $5 million of flotation cost of the 12 % bonds over the issue's 30 year life. Mullet's investment banks could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they nor Mullet's management have anticipate will fall below 10% any time soon, but there is a chance that the interest will increase. A call premium of 12% would require retire old bonds and flotation cost on the new issue 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 proceeds being invested in short term government securities returning 6% annually during the interim period.
A. Perform a complete bond refund analysis. What is the bond refunding's NPV ?
B. What factors would influence Mullets decision to refund now rather than later.