Daniel Kaffe CFO of Kendrick Enterprises is evaluating a 10y

Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 6.5 percent loan with gross proceeds of $5,250,000. The interest payments on the loan 2.8 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 40 percent, and the loan will not increase the risk of financial will be made annually. Flotation costs are estimated to be 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.) Net present value calculations and round your answer to 2 decimal places, e.g, 32.16.) $ 47,930.37 b. Calculate the net present value of the loan including flotation costs. (Do not round intermediate Net present value S 99,069 63 eBook &Resources; eBook 186 APV Example Check my work Previous attemp O Type here to s

Solution

NPV of Loan When Floatation cost not considered NPV of Loan Gross Proceeds $ 52,50,000.00 Less: P.V of Interest($5250000*6.5%*60%*7.1888) $ 14,71,906.80 Less: After tax P. V of Principal($5250000*.53273) $ 27,96,675.00 NPV $    9,81,418.20 P.V of Annuity(6.5%) for 10 years 7.1888 P.V of $1 (6.5%) for 10 years 0.5327 NPV of Loan When Floatation cost considered Floatation Cost=($5250000*.028) $    1,47,000.00 Annual Floatation Expense($147000/10) $       14,700.00 NPV of Loan Gross Proceeds $ 52,50,000.00 Less: P.V of Interest($5250000-$147000)*6.5%*60%*7.1888) $ 14,30,693.41 Less: After tax P. V of Principal($5250000*.53273) $ 27,96,675.00 Add: P.V of after tax Floatation Cost($14700*60%*7.1888) $       63,405.22 NPV $ 10,86,036.81