Prepare a report, not to exceed four pages, on the following refunding problem: Complete Problem 20-5, "Bond Refunding Analysis" on page 822 in your textbook. The spreadsheet template that you would use to complete the problem looks like the one on page 811(example furnished) . Write a short memo after completing your calculations on whether the bond should be refunded and why. In addition, the report should indicate how these bond refunding steps could be applied to your chosen company. Include responses to the following questions in your report: 1. Should the company refund the issuance? Provide a substantive rationale as to why the company should or should not proceed with the refunding process. 2. What critical factors should management take into account as it contemplates the refunding decision? 3. Assess how these bond refunding steps could be applied to your chosen company. (20.5) Mullet technologies is considering whether or not to refund a $75 million, 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 interest rates will fall below 10% any time soon, but there is a chance that rates will increase. A call premium of 12% would be required to retire the old bonds, and floatation costs on the new issue would amount to $5 million. Mullet?s marginal federal-plus-state tax is 40%. The new bonds would be issued I month before the old bonds are called, with the proceeds being invested in short-term government securities returning 6% annually during the interim period. A. Perform a complete bond refunding analysis. What is the bond refunding?s NPV? B. What factures would influence Mullet?s decision to refund now rather than later?
Paper#5639 | Written in 18-Jul-2015Price : $25