Mullet Technologies is considering whether or not to refund a $50 million, 15% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $7 million of flotation costs on the 15% 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 13% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4 million. Mullet's marginal federal-plus-state tax rate is 35%. 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.

a. Conduct a complete bond refunding analysis. What is the bond refunding's NPV?

b. What factors would influence Mullet's decision to refund now rather than later?