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3 Chapter 19. Ch 19-06 Build a Model
4 Note: Fill in the shaded cells with the appropriate formula
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7 Mullet Technologies is considering whether or not to refund a $75 million, 12 percent coupon, 30 year bond issue that was sold 5 years
8 $5 million of flotation costs on the 12 percent bonds over the issue's 30-year life. Mullet's investment bankers have indicated that the c
9 new 25-year issue at an interest rate of 10 percent in today's market. Neither they nor Mullet's management anticipate that interest ra
10 percent any time soon, but there is a chance that interest rates will increase.
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13 A call premium of 12 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million
14 federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds be
15 term government securities returning 6 percent annually during the interim period.
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17 Current bond issue information
18 Par value $ 75,000,000
19 coupon rate 12%
20 original maturity 30
21 remaining maturity 25
22 original flotation costs $ 5,000,000
23 Call premium 12%
24 Tax rate 40%
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27 New issue information
28 Coupon rate 10.0000%
29 maturity 25
30 flotation costs $ 5,000,000
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32 Time between issuing new bonds and calling old bonds (months) 1
33 Rate earned on proceeds of new bonds before calling old bonds (annual) 6%
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35 a. Perform a complete bond refunding analysis. What is the bond refunding's NPV?
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1 11/27/2006
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priate formula
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r bond issue7that was sold 5 years ago. It is amortizing
8 indicated that the company could sell a
t bankers have
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agement anticipate that interest rates will fall below 10
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13 amount to $5 million. Mullet's marginal
w issue would
14with the proceeds being invested in short-
ds are called,
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