Question

The Landers Corporation needs to raise $1.70 million of debt on a 20-year issue. If it places the bonds privately, the interest rate will be 12 percent. Twenty five thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 11 percent, and the underwriting spread will be 3 percent. There will be $110,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 20-year period, at which time it will be repaid. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. For each plan, compare the net amount of funds initially available—inflow—to the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 14 percent annually. Use 7.00 percent semiannually throughout the analysis. (Disregard taxes.) (Assume the $1.70 million needed includes the underwriting costs. Input your present value of future payments answers as negative values. Do not round intermediate calculations and round your answers to 2 decimal places.) private placement Public Issue Net amt to Landers ___________ _________________ Present value of future payments _____________ ______________ NPV ____________ ________________

Answer 1

Private Placement
total debt		1700000
less out of pocket cost		25000
net amount to lenders		1675000
Interest payment	1700000*12%*1/2	102000
present value of Interest payment made towards private placement of Bonds at 7% for 40 semiannual period	Interest payment*PVAF at 7% for 40 semiannual period	13.3317*-102000	-1359833.4
present value of principal payment at 40 th semiannual period	principal payment*PVF at 7%	1700000*.06678	-113526
total present value of payments			($1,473,359.40)
PVAF ta 7% for 40 semiannual period	1-(1+r)^-n / r	1-(1.07)^-40 / .07	.93321/.07	13.3317
PVF at 7% at 40 semiannual period	1/(1+r)^n	1/(1.07)^40		0.066780381
Net present value private offering	net amount to lenders+present value of payments to be made	1675000-1473360.95	201639.05
Public Issue
total debt		1700000
less out of pocket cost		90000
Underwriting cost 3% of funds borrowed	1700000*3%	51000
net amount to lenders		1559000
Interest payment	1700000*11%*1/2	93500
present value of Interest payment made towards private placement of Bonds at 7% for 40 semiannual period	Interest payment*PVAF at 7% for 40 semiannual period	13.3317*-93500	-1246513.95
present value of principal payment at 40 th semiannual period	principal payment*PVF at 7%	1700000*.06678	-113526
total present value of payments			($1,360,039.95)
PVAF ta 7% for 40 semiannual period	1-(1+r)^-n / r	1-(1.07)^-40 / .07	.93321/.07	13.3317
PVF at 7% at 40 semiannual period	1/(1+r)^n	1/(1.07)^40		0.066780381
Net present value public offer	net amount to lenders+present value of payments to be made	1559000-1360039.95	198960.05
Net present value private offering		201639.05
Net present value public offer		198960.05
NPV is greater in case of private offer so It should be preferred over public issue