New bond issueCoupon rate on new bond issueMaturity (in years) of new bond issueFlotation cost on new bond issueTax rateInterest rate on short-term government securitiesNumber of months new bonds issued before old bonds calledInvestment Outlay (After Taxes):Call premium on old bond issueFlotation cost on new bond issueTax savings on old bond issue flotation cost expenseAdditional interest on old bond issueInterest earned on short-term government securitiesTotal after-tax investmentAnnual Flotation Cost Tax Effects:Annual tax savings on new issue flotation costsAnnual lost tax savings from old issue flotation costsNet flotation cost tax savingsAnnual Interest Savings Due to Refunding:Annual interest on old bond issueAnnual interest on new bond issueNet interest savingsAnnual cash flows (flotation cost and interest savings)NPV of bond refunding decision$75,000,0009%25$6,000,00030%5%Formulas#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A#N/A 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 to retire the old bonds, and flotation costs on the new issue would amount to $6 million. Mullet's marginal federal-plus-state tax rate is 30%. The new bonds would be issued 1 month before the old bondsare called, with the proceeds being invested in short-term government securities returning 5% annually during the interim period.The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.Open spreadsheetConduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate calculations. Round your answer to the nearest dollar.$ 20,359,532 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

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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. Conduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate…
Jewel Regal Cars (JRC) must raise $240 million to support operations. To do so, JRC plans to issue new bonds. Investment bankers have informed JRC that the flotation costs will be 4% of the total amount issued. If the market value of each bond is $1,000, how many bonds must JRC sell to net the $240 million that it needs? There are no other issuing expenses or fees in the offering.
Orange Ltd is a AAA credit rating company and plans to raise new capital for its new project. The company will use both debt and equity instruments to fund the new project. Orange Ltd will issue 100 new units, 10-year bonds, each bond with a face value of $1000. Each bond will pay a 10% per annum coupon to be paid semi-annually. Currently each bond can be purchased at a price of $950. Previously, Orange Ltd had never issue bonds. Orange Ltd will issue 100 new units of ordinary shares to add to the current 900 units. The current share has a price of $30 each with last year’s dividend at $1.50 per share. The growth rate for earnings and dividends is estimated to be 10% per annum. Orange Ltd will issue 200 new units of preference shares is currently selling at $45 per share to add to the current 800 shares. The preference shares carry a yearly dividend of $4.00 per share. The flotation costs are 1% of the selling price for the preference shares. The relevant corporate tax rate is 30%.…
XYZ, Inc. is considering purchasing Widget, Inc. XYZ would finance the purchase using its current target mix of debt and equity: 60% debt, 40% equity. Widget currently has 8% coupon debt outstanding, which pays interest semiannually, matures in 25 years and is now priced at $833.13 per bond. Widget equity is not publicly traded, so its beta is not available. You are able to gather the following information however: Historical risk premium 6.5% Long run T-bonds 6.0% In addition, you found a portfolio of comparable firms to Widget. The beta of such portfolio is 1.6, and its debt/equity ratio is 1. In addition, XYZ'a marginal tax rate is 40%. The expected internal rate of return on Widget's cash flows is 12%. Should XYZ purchase Widget?
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.
Orange Ltd is a AAA credit rating company and plans to raise new capital for its new project. The company will use both debt and equity instruments to fund the new project. Orange Ltd will issue 100 new units, 10-year bonds, each bond with a face value of $1000. Each bond will pay a 10% per annum coupon to be paid semi-annually. Currently each bond can be purchased at a price of $950. Previously, Orange Ltd had never issue bonds. Orange Ltd will issue 100 new units of ordinary shares to add to the current 900 units. The current share has a price of $30 each with last year’s dividend at $1.50 per share. The growth rate for earnings and dividends is estimated to be 10% per annum. Orange Ltd will issue 200 new units of preference shares is currently selling at $45 per share to add to the current 800 shares. The preference shares carry a yearly dividend of $4.00 per share. The flotation costs are 1% of the selling price for the preference shares. The relevant corporate tax rate is 30%.…
Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 20-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 11 percent. Assume semiannual compounding periods. a. What will these bonds sell for at issuance? b. Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? c. Repeat part (b) using the straight-line method for the interest deduction.
Nebraska Furniture Mart (NFM) is considering a zero-coupon bond issue to raise $500 million in order to build the new NFM store to be located in Dallas, TX. Assuming NFM issues individual bonds with a par value of $1,000 and with a maturity of 25 years, approximately how many bonds will NFM have to issue in order to raise the $500 million if investors demand a yield to maturity of 13%? (Assume semiannual compounding)
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?
Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate 10.0 percent with interest paid semiannually and a 10-year maturity. Investors require a return of 9.0 percent. A. Compute the market value of the bonds B. How many bonds will the firm have to issue to receive the needed funds C. What is the firms after-tax cost of debt if the firms tax rate is 34 percent
Universal Manufacturing plans to issue long-term bonds to raise funds to support future expansion. The company has existing bonds outstanding that are similar to the new bonds it expects to issue. The existing bonds have a face value equal to $1,000, have a coupon rate of interest equal to 5 percent (semiannual payments), and mature in 14 years. These bonds are currently selling for $1,084 each. Universal’s marginal tax rate is 35 percent. (a) What should be the coupon rate on the new bond issue? (b) What is Universal’s after-tax cost of debt?
Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandal's flotation expense on the new bonds will be $50 per bond. Crandal's marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds? A. 10.25% B. 8.76% C. 8.12% D. 7.49%

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