...Public Price = Firm Price/(1-Spread) P-17: Comparison of private and public debt offering (LO15-1) The Landers Corporation needs to raise $1.60 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. For each plan, compare the net amount of funds initially available-inflow-to the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 12 percent annually. Use 6 percent semiannually throughout the analysis. (Disregard taxes.) 3 4 Given: 2 DEBT OPTIONS ~ 15 Private Public 16 FV 1,600,000 1,600,000 17 n 40 40 18 i 5.0% 4.5% 19 6.0% 6.0% 20 PMT 80,000 72,000 21 Out of Pocket Costs: 20,000 120,000 22 Spread %: 2.0% 23 Spread Amount: 24 25 26 Funds Initially Available: Minus PV: Net Present Value: 27 28 On Own-Partial PVB =PMT (1-1/(1+r)^)/r+FV/(1+r) NPV Funds Initially Available - PV of the Debt Obligation