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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
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 |
availableinflowto 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.) |
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