The Landers Corporation needs to raise $1.6 million of debt on a 20-year issue. If it places the bonds privately, the interest rate will be 10 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting spread will be 2 percent. There will be $120,000 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. Which plan offers the higher net present value? For each plan, compare the net amount of funds initially availableâinflowâto the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 12 percent annually, but use 6 percent semiannually throughout the analysis. (Disregard taxes.)
| The Landers Corporation needs to raise $1.6 million of debt on a 20-year issue. If it places the bonds privately, the |
| interest rate will be 10 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, |
| the interest rate will be 9 percent, and the underwriting spread will be 2 percent. There will be $120,000 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. |
| Which plan offers the higher net present value? For each plan, compare the net amount of funds initially |
| availableâinflowâto the present value of future payments of interest and principal to determine net present |
| value. Assume the stated discount rate is 12 percent annually, but use 6 percent semiannually throughout the |
| analysis. (Disregard taxes.) |
Related questions
The Sunbelt Corporation has $30 million of bonds outstandingthat were issued at a coupon rate of 10.775 percent seven yearsago. Interest rates have fallen to 10.20 percent. Mr. Heath, theVice-President of Finance, does not expect rates to fall anyfurther. The bonds have 18 years left to maturity, and Mr. Heathwould like to refund the bonds with a new issue of equal amountalso having 18 years to maturity. The Sunbelt Corporation has a taxrate of 36 percent. The underwriting cost on the old issue was 2.3percent of the total bond value. The underwriting cost on the newissue will be 1.1 percent of the total bond value. The originalbond indenture contained a five-year protection against a call,with a call premium of 7 percent starting in the sixth year andscheduled to decline by one-half percent each year thereafter(consider the bond to be seven years old for purposes of computingthe premium). Use Appendix D for an approximate answer butcalculate your final answer using the formula and financialcalculator methods. Assume the discount rate is equal to theaftertax cost of new debt rounded up to the nearest whole percent(e.g. 4.06 percent should be rounded up to 5 percent). |
| a. | Compute the discount rate. (Do not round intermediatecalculations. Input your answer as a percent rounded up to thenearest whole percent.) |
| Discount rate | % |
| b. | Calculate the present value of total outflows. (Do notround intermediate calculations and round your answer to 2 decimalplaces.) |
| PV of totaloutflows | $ |
| c. | Calculate the present value of total inflows. (Do notround intermediate calculations and round your answer to 2 decimalplaces.) |
| PV of totalinflows | $ |
| d. | Calculate the net present value. (Negative amount shouldbe indicated by a minus sign. Do not round intermediatecalculations and round your answer to 2 decimalplaces.) |
| Net presentvalue | $ |
| e. | Should the Sunbelt Corporation refund the old issue? | ||||
|
104.
Buchanan Corp. is refunding $9 million worth of 12% debt. Thenew bonds will be issued for 7%. The corporation's tax rate is 31%.The call premium is 8%. What is the net cost of the callpremium? |
102.
101.
Assume, in assessing the initial P/E ratio, the investmentbanker will first determine the appropriate industry P/E based onthe Standard & Poorâs 500 Index. Then a .50 point will be addedto the P/E ratio for each case in which Richmond Rent-A-Car issuperior to the industry norm, and a .50 point will be deducted foran inferior comparison.
On this basis, what should the initial P/E be for the firm?(Round your answer to 1 decimal place.)
99.
Firm X needs to net $8,000,000 from the sale of common stock.Its investment banker has informed the firm that the retail pricewill be $24 per share, and that the firm will receive $21.00 pershare. Out-of-pocket costs are $600,000. How many shares must besold? |
98.
| Raybac is about to go public. Its present stockholders own580,000 shares. The new public issue will represent 810,000 shares.The shares will be priced at $55 to the public with a 16% spread.The out-of pocket costs will be $570,000. What are the net proceedsto the firm? The investment banking firm of Einstein & Co. will use adividend valuation model to appraise the shares of the ModernPhysics Corporation. Dividends (D1) at the endof the current year will be $1.54. The growth rate (g) is9 percent and the discount rate (Ke)is 13 percent. b. If there is a 5 percent total underwritingspread on the stock, how much will the issuing corporation receive?(Do not round intermediate calculations and round youranswer to 2 decimal places.) c. If the issuing corporation requires a netprice of $37.00 (proceeds to the corporation) and there is a 5percent underwriting spread, what should be the price of the stockto the public? (Do not round intermediate calculations andround your answer to 2 decimal places.) |
