Question

Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 6.7 percent loan with gross proceeds of $5,500,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.4 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 24 percent and the loan will not increase the risk of financial distress for the company. a. Calculate the net present value of the loan excluding flotation costs. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Calculate the net present value of the loan including flotation costs. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Net present value b. Net present value

Answer 1

PAGE DATE GNen ,oLo an Amount =45500000 Noofyearsn=loyers Tax Rate tz 24% -0.24 Coupon Rate 6.7 S Flotation Cost Rade 2-4% 01nterest Atter Tax -Coan Amt. x Coupon Rate x (-TaxRale) 二$SSooo0o ×6-7%×(1-024) 二$280 060 Fiotahon Cust After Tax LOan Amountx Fiotation Cost Rate (1-Tax Rate) $5S0000ox 2-44%. x (-0-24) $100320 Flotation Cost Per Year Flotahion Cos After Tax No.of Years $100 320 $10032 10 Cost of Debt After Tax Coupon Rate C1- Tax Rate) 6.7% (1-0.24) c s.092% 0.050g2 Present Value Annuih Factor for lo Years (1+0.0s0g2)T Cit S.092 % 0.0S092(+0.0Sa 7.687 Year 0.0sag2 Present Value Factor lo I+oosogo D 6086 て1チ)^

PAGE DATE: a Net Present Value of the Loan Excludinq Flotation CoSh Fac hor Interest Ater Tax x Presen Value Annwy Loon Amount x Presen Vakue Fachor @ 1oh Tear)LoanAm $280060X 7.6874 + $5S00000XO60866)$5Soo0On $2152933.244+334730 0 )$SSo0000 $550023 3.24 (-) SS00000 $233 24 Ne Present Value Of the Loan lncluding Frotation CoSh =Net Pres ent Value of He Loan excluding Flotetion Cost t Flotation Cost x Present Valae Annaiy Factor $233.24 +$ 10032 X 7.6874) $233. 24 +77119 9968 $773S3.2368 4 77 3S3 24