The Landers Corporation needs to raise $1.80 milion of debt on a 15-year issue.

Question

The Landers Corporation needs to raise $1.80 milion of debt on a 15-year issue. Ifit plasces the bonds privately the interest rate will be 14 peroent For a public issue, the interest rate will be 13 percent, and the underwriting spread will be 2 percent. There will be $ will be outstanding for the full 15-year period, at which time it will be repaid. Use Appendix B and Appendix D for an approxdimate Twenty thousand dollars in out-of-pocket costs will be incured. Assume interest on the debt is paid semiannually, and the debt 100,000 in out-of-pocket costs answer but calculate your final answer using the fomulia and financial calculator methods. a. For each pian, compane the net amount of funds initially available inflow-to the present value of fuhure payments of interest and prindipel to determine net prese percent annully. Use 8.00 percent semiannually throughout the analysis. ( answers as negative values. Do not round Intermediate caloulations and round your answers to 2 decimal places.) Disregard taxes.) (Assume the $1.30 million needed includes the underwriting costs. Input your present value of future payments Private Placement Public Issue o Landens Present value off future payments Net present value 0.00

Explanation / Answer

ANSWER TO THIS QUESTION Input variables Debt issue amount                                                              $1,800,000 NUMBER OF YEARS                                                               15 YEARS PRIVATE PLACEMENT INTEREST RATES                         14% PRIVATE PLACEMENT OUT OF POCKET COST             $20000 PUBLIC ISSUE INTEREST RATES                                         13% UNDEWRITTING SPREAD                                                     2% PUBLIC ISSUE OUT OF POCKET COSTS                           $100000 NO. OF INTEREST PAYMENT/ YEAR                                2 DISCOUNT RATE                                                                    16% P.A ( 8% SEMI ANNUALLY) PRIVATE PLACEMENT: DEBT ISSUED $ 1,800,000.00 Less out   of   pocket   cost $        20,000.00 Net   proceeds $ 1,780,000.00 AMOUNT OF SEMI ANNUALY INTEREST PAYMENT $      144,000.00 PV OF OUTFLOWS ($1,621,120.80) present value is calculated using = interest amount *{{1-(1/(1+interest rate)^time)}/interest rate } NPV $      158,879.20 Public Issue Debt   issued $ 1,800,000.00 Less Underwritting Spread $      100,000.00 Less Out   of   pocket   cost $        36,000.00 Net   proceeds $ 1,664,000.00 AMOUNT OF SEMI ANNUALY INTEREST PAYMENT $      117,000.00 PV OF OUTFLOWS ($1,317,160.65) present value is calculated using = interest amount *{{1-(1/(1+interest rate)^time)}/interest rate } NPV $      346,839.35

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