Question
In: Finance
The Landers Corporation needs to raise $1.70 million of debt on a 20-year issue. If it...
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 14 percent. Fifteen thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 12 percent, and the underwriting spread will be 1 percent. There will be $130,000 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 18 percent annually. Use 9.00 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.)
b. Which plan offers the higher net present
value?
| Public issue | |
| Private placement |
Solutions
Expert Solution
| Amount of loan | = | $1.7 million | ||||||||
| Rate | = | 9% semi annually | ||||||||
| Private issue | ||||||||||
| Expenses | = | $15,000 | ||||||||
| Net amount available | = | $1.7 m-$0.015m | ||||||||
| = | $1.685 m | |||||||||
| interest | = | $1.7 m* 0.07=$0.119m | ||||||||
| PV of interest & loan payment | = | PVAF(9%,40)*interest+PVF(9%,40)*loan amount | ||||||||
| = | (10.7574*0.119)+($1.7 m*0.0318) | |||||||||
| = | $1.2801 m+$0.0541 m | |||||||||
| = | $1.3342 | |||||||||
| (a) | Amount receievd/PV of payments | = | 1.685/1.3342=1.2629 | |||||||
| (b) | NPV | = | amount received-PV of interest & principal | |||||||
| = | $1.685-$1.3342 | |||||||||
| = | $0.3508 | |||||||||
| Public issue | ||||||||||
| Expenses | = | $130,000 | ||||||||
| Underwriting exp | = | 1.7m*0.01=0.017millions ($17000) | ||||||||
| Net amount available | = | $1.7 m-0.017 m-0.13m | ||||||||
| = | $1.553 m | |||||||||
| interest | = | $1.7 m* 0.06=$0.102 m | ||||||||
| PV of interest & loan payment | = | PVAF(9%,40)*interest+PVF(9%,40)*loan amount | ||||||||
| = | (10.7574*0.102)+($1.7 m*0.0318) | |||||||||
| = | $1.0972548m+$0.0541 m | |||||||||
| = | $1.1513548 millions | |||||||||
| (a) | Amount receieved/PV of payments | = | 1.553/1.1513548=1.3488 | |||||||
| NPV | = | $1.553-$1.1513548 | ||||||||
| = | $0.4016452 millions | |||||||||
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