The Landers Corporation needs to raise $1.60 million of debt ona 5-year issue. If it places the bonds privately, the interest ratewill be 10 percent. Thirty thousand dollars in out-of-pocket costswill be incurred. For a public issue, the interest rate will be 11percent, and the underwriting spread will be 2 percent. There willbe $140,000 in out-of-pocket costs. Assume interest on the debt ispaid semiannually, and the debt will be outstanding for the full5-year period, at which time it will be repaid. Use Appendix B andAppendix D for an approximate answer but calculate your finalanswer using the formula and financial calculator methods.
a. For each plan, compare the net amount of fundsinitially available—inflow—to the present value of future paymentsof interest and principal to determine net present value. Assumethe stated discount rate is 16 percent annually. Use 8.00 percentsemiannually throughout the analysis. (Disregard taxes.)(Assume the $1.60 million needed includes the underwritingcosts. Input your present value of future payments answers asnegative values. Do not round intermediate calculations and roundyour answers to 2 decimal places.)
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| | Private Placement | Public Issue | | Net amount to Landers | | | | Present value of future payments | | | | Net present value | $0.00 | $0.00 |
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