The Landers Corporation needs to raise $2.20 million of debt on a 25-year issue.
ID: 2651096 • Letter: T
Question
The Landers Corporation needs to raise $2.20 million of debt on a 25-year issue. If it places the bonds privately, the interest rate will be 16 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 15 percent, and the underwriting spread will be 3 percent. There will be $80,000 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.
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.)
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.)
Private Placement Public issue Net Amount to Landers Present Value of Future Payments Net Present ValueExplanation / Answer
Answer:-
[ Private Placement ]
Need to Raise = 2.2 million
= 2.2 * 1000000
= 2200000
Debt is paid semi-annually, so that years multiply by 2 & interest rate divided by 2
Years (n) = 25 * 2
= 50 years (semi-annually)
Interest rate (r) = 16% / 2
= 8% (semi-annually)
Out of Pocket Expense = 30000
Net Amount to Landers = 2200000 - 30000
= 2170000
=(2170000 * 8%)
= 173600
Net present value = Present value of future payments - Net amount to Landers
= 2170000 - 1903003.2
= 266996.8
[ Public Placement ]
Need to Raise = 2.2 million
= 2.2 * 1000000
= 2200000
Debt is paid semi-annually, so that years multiply by 2 & interest rate divided by 2
Years (n) = 25 * 2
= 50 years (semi-annually)
Interest rate (r) = 15% / 2
= 7.5% (semi-annually)
Out of Pocket Expense = 80000
Underwriting Spread = 3%
Net Amount to Landers = (2200000 - 3%) - 80000
= 2134000 - 80000
= 2054000
=(2054000 * 7.5%)
= 154050
Net present value = Present value of future payments - Net amount to Landers
= 2054000 - 1688696.1
= 365303.9
Years Amount PVIFA at 9% (semi-annually) Present value of future payments 1 to 50=(2170000 * 8%)
= 173600
10.962 1903003.2 TOTAL 1903003.2Related Questions
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