The Landers Corporation needs to raise $1.50 million of debt on a 10-year issue.
ID: 2655327 • Letter: T
Question
The Landers Corporation needs to raise $1.50 million of debt on a 10-year issue. If it places the bonds privately, the interest rate will be 12 percent. Thirty five thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting spread will be 4 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 10-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 16 percent annually. Use 8.00 percent semiannually throughout the analysis. (Disregard taxes.) (Assume the $1.50 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.)
The Landers Corporation needs to raise $1.50 million of debt on a 10-year issue. If it places the bonds privately, the interest rate will be 12 percent. Thirty five thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting spread will be 4 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 10-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.
Explanation / Answer
Private Placement
Net amount to Landers = 1500000 -35000 = 1465000
Semi Annual interest Expenses = 1500000*12%*1/2 = $ 90000
Present value of future payments = - 90000*PVA(8%,20) - 1500000*PV(8%,20)
Present value of future payments = -90000 * 9.81814741 - 1500000*0.21454821
Present value of future payments = - $ 1,205,455.58
Net present value = Net amount to Landers + Present value of future payments
Net present value = 1465000 - 1,205,455.58
Net present value = $ 259,544.42
Public Placement
Net amount to Landers = 1500000 -130000 - 1500000*4%= 1310000
Semi Annual interest Expenses = 1500000*9%*1/2 = $ 67500
Present value of future payments = - 67500*PVA(8%,20) - 1500000*PV(8%,20)
Present value of future payments = -67500 * 9.81814741 - 1500000*0.21454821
Present value of future payments = - $ 984,547.27
Net present value = Net amount to Landers + Present value of future payments
Net present value = 1310000 - 984,547.27
Net present value = $ 325,452.73
Answer
Which plan offers the higher net present value?
Public issue
Private Placement Public Issue Net amount to Landers 1,465,000.00 1,310,000.00 Present value of future payments -1,205,455.58 -984,547.27 Net present value 259,544.42 325,452.73Related Questions
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