Question
In: Finance
Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 5.9 percent loan with gross proceeds...
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Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 5.9 percent loan with gross proceeds of $5,970,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 1.6 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 34 percent, and the loan will not increase the risk of financial distress for the company. |
| a. |
Calculate the net present value of the loan excluding flotation costs. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Net present value | $ |
| b. |
Calculate the net present value of the loan including flotation costs. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Net present value | $ |
Solutions
Expert Solution
a)
gross proceeds from loan = 5,970,000
Net present value of the loan excluding flotation cost = gross proceeds from loan - after tax present value of interest - PV of principal loan repayment
above image shows formulas
b)
here gross proceeds from loan = 5970000*(1 - flotation cost)
= 5970000*(1 - 1.60%)
= 5,874,480
above image shows formulas
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