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QUESTION

Xenox Incorporated is considering whether to raise $1 million of debt on a 20-year issue by public offering or private placement.

  1. Xenox Incorporated is considering whether to raise $1 million of debt on a 20-year issue by public offering or private placement. If it raises the money in a public offering, it will have an interest rate of 4% and the underwriting spread will be 3.0%. It will also have to pay $30,000 in out-of-pocket costs. On the other hand, if Xenox raises the money via a private placement its interest rate will be 3% and it will incur $30,000 in out-of-pocket costs. Either way, the interest must be paid semiannually and the debt will remain outstanding the full 20 years at which time it will be paid. The current market rate of interest is 6% per annum. Ignore taxes. Find which plan offers the higher net present value?
  1. A 20-year zero coupon bond is issued today to yield 4%. Find (1) the initial price of the bond; (2) the price of the bond if immediately after issue the market rate rose to 5%; (3) the price of the bond if immediately after issue the market rate dropped to 3%.
  1. Auto Manufacturing Company plans to lease to the Mississippi Tractor Corporation a tractor-trailer for $400,000 for 15 years. If Auto Manufacturing wants to earn 10% on its investment, find (1) how much the annual lease payments will be; (2) how much the lease payments would be if Auto Manufacturing can pass along to Michigan Sales an immediate tax credit of $40,000.
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