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 12 percent. 25000 dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 11 percent, and the underwriting spread will be 3 percent. There will be $110,000 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 D.

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

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

Explanation / Answer

Present value of future interest payments
interest payments (semiannually) = 11%/2 = 5.5%
interest payments = 5.5% x $1,000,000 = $55,000
PVA = A x PVIF (n = 40,i = 6%) (Appendix D)
PVA = $55,000 x 15.046
PVA = $827,530
Present value of lump-sum payment at maturity
PV = FV x PVIF (n = 40,i = 6%) (Appendix B)
PV = $1,000,000 x,097
PV = $97,000
15-14,Continued
$827,530
+ 97,000
$924,530 total present value
The net present value equals the net amount to Alston minus the present value of future payments.
$975,000 net amount to Alston

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