Today is January 1, 2009. The state of Iowa has offered your firm a subsidized l
ID: 2614422 • Letter: T
Question
Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing) payments over 3 years. The first payment is due today and your taxes are due January 1 of each year on the previous year's income. The yield to maturity on your firm's existing debt is 8 percent. What is the APV of this subsidized loan? If you rounded in your intermediate steps, the answer may be slightly different from what you got. Choose the closest.
Multiple Choice
?$3,497,224.43
$417,201.05
$840,797
none of the options
Explanation / Answer
Computation of Annual Payment:
PV=$ 10,000,000
N= 3
I= 5%
Payment = Loan / PVAF (3, 5%)
Payment = $3,672,085
2. NPV of Cash Flows
CF0 = $10,000,000
CF1= -$3,502,085 = -$3,172,085 - 0.66 * $500,000
CF2= -$3,556,011
CF3= -$3,612,632I= 8%
APV of the Payment = $840,797
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