Problem:
The Howard Corporation needs to raise $1 million of debt on a 20-year issue. If it places the binds privately, the interest rate will be 11 percent, and $25,000 in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 10 percent, and the underwriting spread will be 5 percent. There will be $75,000 in out-of-pocket costs. Assume interest on the dept is paid semiannually, and the debt will be outstanding for the full 20 years, at which time it will be repaid.
Q1. Which plan offers the higher present value?
Q2. 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, but use 6 percent semiannually throughout the analysis (disregard taxes)