Excel Online Structured Activity: Refunding Analysis

Mullet Technologies is considering whether or not to refund a $$200$ million, $14\%$ coupon, $30-$year bond issue that was sold $5$ years ago. It is amortizing $$7$ million of flotation costs on the $14\%$ 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 $11\%$ in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below $11\%$ 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 $$5$ million. Mullet's marginal federal$-$plus$-$state tax rate is $40\%.$ 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 $6\%$ annually during the interim period.

Vandell's beta is $1\mathrm{.}35.$ Hastings estimates that if it acquires Vandell, interest payments will be $$1,500,000$ per year for $3$ years. The free cash flows are supposed to be $$2\mathrm{.}4$ million, $$2\mathrm{.}8$ million, $$3\mathrm{.}4$ million, and then $$3\mathrm{.}98$ million in Years $1$ through $4,$ respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year $3$ to $$26\mathrm{.}6$ million so that the target capital structure will be $45\%$ debt. Assume that with this higher level of debt the interest rate would be $8\mathrm{.}0\%,$ and assume that interest payments in Year $4$ are based on the new debt level from the end of Year $3$ and new interest rate. Free cash flows and tax shields are projected to grow at $4\%$ after Year $4.$

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

What is the value of the unlevered firm? Enter your answer in dollars. For example, an answer of $$1\mathrm{.}2$ million should be entered as $1,200,000,$ not $1\mathrm{.}2.$ Do not round intermediate calculations. Round your answer to two decimal places.

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What is the value of the tax shield? Enter your answer in dollars. For example, an answer of $$1\mathrm{.}2$ million should be entered as $1,200,000,$ not $1\mathrm{.}2.$ Do not round intermediate calculations. Round your answer to two decimal places.

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What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $$10\mathrm{.}25$ million in debt. Enter your answer in dollars. For example, an answer of $$1\mathrm{.}2$ million should be entered as $1,200,000,$ not $1\mathrm{.}2.$ Do not round intermediate calculations. Round your answer to two decimal places.

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