Question

Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 7.30 percent loan with gross proceeds of $5,250,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 1.10 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 34 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.

b.	Calculate the net present value of the loan including flotation costs.

Answer 1

The answer for above problem is explained below.

of the loan calculation of Net present value Excluding Flotation costs; (loan) NPV = [Gross proceeds ] - [After tax present value of anterest - After tax present value of principal payments NPulau = ($ 5,250,000] - 17.3066] *[$ 5,250,000] x[1-34%] * PVIFA (7.30%, 10) [ $5, 250,000 ] [1607376 2 NPV coane = $5,250,000] -($ 252,945) x[6.927207] - $2595,147.721 · Nav Cloan) - | $ 902, 649.90

One Calculation of the net present Value of the Roon Encluding Flotation costs Flotation costs = $ 5,250,000 1.10%. 5 Flotakon costs = $ 57, 750 = $57,750 Annual Flotation costs 10 years -> Annual Flotation costs = ($ 57751 (NPU)Mn = proceeds Net of flotahon costs] - [ After tax PV Of Interest] - [ After tax pr of principal payments] + [ PV of the Flotation Cost tax Shield] = (NPV) Mn = { $ 5,250,000 - $ 57,750 ] -[7.30-17] [ $ 5,250,000] [1-34%] * PvIFA (7-3046,10) $5,250,000 1 + $5,775 x 34). X PYIFA (7-3046,10) [1.073710J 71 9,775 x 34% x pri

» (Never = ($ 5,142,250 ) -{$ 252,945 x 6.92/2017] -S$ 2,595,147.121] + ($1963.5 x 6.92707] - (NPV pon – #859535.859