The Landers Corporation needs to raise $1.00 million of debt on a 25-year issue.
ID: 2541051 • Letter: T
Question
The Landers Corporation needs to raise $1.00 million of debt on a 25-year issue. If it places the bonds privately, the interest rate will be 11 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 10 percent, and the underwriting spread will be 4 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 25-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 $1.00 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:
Net Amount to Landers ____________
Present Value of Future Payments ______________
Net Present Value ________________
Public Issue
Net Amount to Landers ____________
Present Value of Future Payments ______________
Net Present Value ________________
Explanation / Answer
Private Placement Net amount to Landers (Debt-out of pocket expenses) 970,000 (1000,000-30,000) Present value of future payments Interest rate 11% Annual interest 110000 (Debt*interest rate) Semi annual interest 55000 (annual interest /2) Discount rate to be used 7% Time period of debt 25 years Number of semiannual payment 50 (25*2) Present value of Interest ($759,041.05) =PV(7%,50,55000,0,0) =PV(RATE,NPER,AMOUNT,0,0) Present value of debt payment att maturity ($33,947.76) =-1000000*(1/1.07)^50 Present value of future payments ($792,988.81) -759041.05+(-33947.76) Net Present Value 177,011.19 (970000-792988.81) Public Issue Net amount to Landers Debt 1,000,000 Less:Underwriting Exp 40,000 (1000,000*4%) Less:Out of Pocket expenses 100,000 Net amount to Landers (Debt-out of pocket expenses) 860,000 Present value of future payments Interest rate 10% Annual interest 100000 (Debt*interest rate) Semi annual interest 50000 (annual interest /2) Discount rate to be used 7% Time period of debt 25 years Number of semiannual payment 50 (25*2) Present value of Interest ($690,037.31) =PV(7%,50,50000,0,0) Present value of debt payment att maturity ($33,947.76) =-1000000*(1/1.07)^50 Present value of future payments ($723,985.07) -690037.31+(-33947.76) Net Present Value 136,014.93 (860000-723985.07)
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