Mullet Technologies is considering whether or not to refund a $75 million, 14% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $6 million of flotation costs on the 14% bonds over the issues 30-year life. Mullets investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 9% in todays market. Neither they nor Mullets management anticipate that the interest rates will fall below 9% any time soon, but there is a chance that rates will increase. A call premium of 13% would be required to return the old bonds, and flotation costs on the new issue would amount to $6 million. Mullets marginal federal-plus-state tax rate is 40%. The new bonds would be issues 1 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. Conduct a complete bond refunding analysis. What is the bond refundings NPV?

B. What factors would influence Mullets decision to refund now rather than later?