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

Question

The Landers Corporation needs to raise $1.80 million of debt on a 15-year issue. If it places the bonds privately, the interest rate will be 14 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 13 percent, and the underwriting spread will be 2 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 15-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.

The video tutorial for this problem is located at: http://www.viddler.com/embed/ffcc47a1/?f=1&autoplay=0&player=simple&disablebranding=0

For each plan, compare the net amount of funds initially available

The Landers Corporation needs to raise $1.80 million of debt on a 15-year issue. If it places the bonds privately, the interest rate will be 14 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 13 percent, and the underwriting spread will be 2 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 15-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.

The video tutorial for this problem is located at: http://www.viddler.com/embed/ffcc47a1/?f=1&autoplay=0&player=simple&disablebranding=0

Explanation / Answer

a)

Working

  Present value of future payments = pv(rate,nper,pmt,fv)

   Present value of future payments of Public Issue = pv(rate,nper,pmt,fv)

rate = 8%

nper = 15*2 = 30

pmt = 13%*1800000*1/2 =117000

FV = 1,800,000

   Present value of future payments of Public Issue = pv(8%,30,117000,1800000)

   Present value of future payments of Public Issue = $ 1,496,039.85

Present value of future payments of Private Placement = pv(rate,nper,pmt,fv)

rate = 8%

nper = 15*2 = 30

pmt = 14%*1800000*1/2 =126000

FV = 1,800,000

   Present value of future payments of Private Placement = pv(8%,30,126000,1800000)

   Present value of future payments of Private Placement = $ 1,597,359.90

b) Which plan offers the higher net present value?

Private Placement

  Private Placement    Public Issue   Net amount to Landers                       1,780,000           1,664,000   Present value of future payments              (1,597,359.90) (1,496,039.85)   Net present value                    182,640.10         167,960.15

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.