Mullet Technologies is considering whether or not to refund a $75 million, 13% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $8 million of flotation costs on the 13% bonds over the issue's 30-year life. Mullet's investmentbanks have indicated that the company could sell a new 25-year issue at an interest rate of 9% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 9% any time soon, but there is a chance thatrates will increase.A call premium of 11% would be required retire the old bonds, and flotation costs on the new issue would amount to $6 million. Mullet's marginal federal-plus-state tax rate is 30%. The new bonds would be issued 1 month before the old bondsare called, with the proceeds being invested in short-term government securities returning 5% annually during the interim period.The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.Open spreadsheetConduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate calculations. Round your answer to the nearest dollar.6028833 X$

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment or…

Answered: Mullet Technologies is considering…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Five years ago, the State of Oklahoma issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 6% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant. $278,606 $258,606 $238,606 $208,606 $198,606
Paints plans to issue a $1,000 par value, 20 year noncallable bond with a 7% annual coupon paid semiannually. The cost marginal tax rate is 40% but Congress is considering a change in the corporate tax to 30%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?
Castle Company’s pension fund projected that a significant number of its employees would take advantage of a retirement program the company plans to offer in 10 years. Anticipating the need to fund these pensions, the firm bought zero coupon Government of Canada bonds maturing in 10 years. When these instruments were originally issued, they were 6% semiannual 30-year bonds. The stripped bonds are currently priced to yield 3.75%. Their total maturity value is $18,000,000. What is their total cost (price) to Castle today?
Oriole Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: 1. Issue 81,300 shares of common stock at $30 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 6%, 10-year bonds at face value for $2,439,000. It is estimated that the company will earn $757,500 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 106,500 shares of common stock outstanding prior to the new financing.Determine the effect on net income and earnings per share for these two methods of financing. (Round earnings per share to 2 decimal places, e.g. 2.25.) Plan One Issue Stock Plan Two Issue Bonds Net income $ $ Earnings per share $
The Optical World Corporation, a manufacturerof peripheral vision storage systems, needs $10 million to market its new robotics-based vision systems.The firm is considering two financing options: common stock and bonds. If the firm decides to raise thecapital through issuing common stock, the flotationcosts will be 6%, and the share price will be $25. Ifthe firm decides to use debt financing, it can sell a10-year, 12% bond with a par value of $1,000. Thebond flotation costs will be 1.9%.(a) For equity financing, determine the flotationcosts and the number of shares to be sold to net$10 million.(b) For debt financing, determine the flotation costsand the number of $1,000 par value bonds tobe sold to net $10 million. What is the requiredannual interest payment?
Choose the correct answer: (Also provide reasons for incorrect options) Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities. After issuing the bonds, the company was 60% debt financed and 40% common equity financed. Tropical intends to retire 20% of the bonds each year for the next five years and not to issue any new debt. Options- a. All things equal, we would expect Tropical Fruit Drinks cost of capital to decrease gradually over the next five years. b. All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then decrease rapidly. c. All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then increase rapidly. d. All things equal, we would expect Tropical Fruit Drinks cost of capital to increase gradually over the next five years.
New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 10% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 6% in today's market. A call premium of 10% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. Should NYW proceed with the bond refunding? What is the NPV?
Mullet Technologies is considering whether or not to refund a $75 million, 13% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $8 million of flotation costs on the 13% 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 9% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 9% any time soon, but there is a chance that rates will increase. A call premium of 11% would be required to retire the old bonds, and flotation costs on the new issue would amount to $6 million. Mullet's marginal federal-plus-state tax rate is 30%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5% annually during the interim period. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required…
The Mossman Castle Hill has a $19 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.6 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 10 percent call premium on the old issue. The underwriting cost on the new $18,000,000 issue is $530,000, and the underwriting cost on the old issue was $380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyse the refunding decision. Should the old issue be refunded with new debt? (Follow the steps from the textbook example!) Skip Start Solving
Access Ltd is financing a new investment and was previously unsuccessful to secure a similar interest rate as they had with their previous debt from their local Bank. Given their AAA credit rating, they instead decided to issue 5000 units of a 10-year bond to fund the investment. Coupon rate is set at 8% per annum and will be paid quarterly. The face value of one of the bonds is $1,000. The estimated yield for similar bonds of comparable risk rating is 12% per annum. Determine the market price of the one of the bonds.
Horizon Corporation has decided to a capital restructuring. This process of restructuring involves increasing its existing $80 million in debt to $125 million. However, the interest rate on the debt is 9 percent and it is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $60. If the restructuring is expected to increasethe return on equity (ROE), what is the minimum level for EBIT that Horizon’s management must be expecting? Ignore taxes in your answer.
The company has $60,000 to invest. The investment manager proposed two options. Option (A) is to invest in municipal bonds paying 7% annual interest. Option (B) is to invest in a corporate bond paying 9.5% annual interest. Both investments have similar risks. Assume that Pioneer has 15% marginal tax rate. The investment manager recommended to invest the money in municipal bonds. Why in your opinion, the investment manager selected option (A)? What is your recommendation to Pioneer? And why? Would your recommendation change if you apply implicit and explicit tax concepts for the above proposal? And why

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