The Landers Corporation needs to raise $1.70 million of debt on a 20-year issue.

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 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 Dfor 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.) (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.)

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 Dfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

Explanation / Answer

Private Palcement:
$1,700,000-50,000=$1,650,000 net amount to landers

Present value fofuture payments:

Interest=14%/2=7% (semi annual)
period=20 years=20*2 =40 years
interest=1,700,000*7%=$119,000

=119,000*(P/A,9%,40)+1,700,000/(1+9%)^40
=(119,000*10.75736)+54123.89
=$1,334,250
Net present value to lander=1,650,000-1,334,250=$315,750

Public issue:

$1.7mn debt and 1% spread out cost and 130,000 other cost
net amount=1.6mn-(1%*1.6mn)-130000=$1,454,000

Interest=12%/2=6% (semi annual)
period=20 years=20*2 =40 years
interest=1,700,000*6%=$1102,000

=102,000*(P/A,9%,40)+1,700,000/(1+9%)^40
=(102,000*10.75736)+54123.89
=$1,086,830
Net present value to lander=1,454,000-1,334,250=$367,170

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