Problem 15-17 Comparison of private and public debt offering[LO15-1]

The Landers Corporation needs to raise $1.70 million of debt ona 20-year issue. If it places the bonds privately, the interestrate will be 12 percent. Twenty five thousand dollars inout-of-pocket costs will be incurred. For a public issue, theinterest rate will be 11 percent, and the underwriting spread willbe 3 percent. There will be $110,000 in out-of-pocket costs. Assumeinterest on the debt is paid semiannually, and the debt will beoutstanding for the full 20-year period, at which time it will berepaid. Use Appendix B and Appendix Dfor an approximate answer butcalculate your final answer using the formula and financialcalculator 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 14 percent annually. Use 7.00 percentsemiannually throughout the analysis. (Disregard taxes.)(Assume the $1.70 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.)

	Private Placement Public Issue Net amount to Landers Present value of future payments Net present value