Flotation costs
10-year, 9 percent loan, with gross proceeds of $4,250,000. Kendrick’s pretax
cost of debt is 9 percent. Flotation costs are estimated to be 1.25 percent of
gross proceeds and will be amortized using a straight-line schedule over the
10-year life of the loan.
Kendrick is subject to a corporate tax rate of 40 percent.
The loan will not increase the risk of financial distress for the firm.
1.Calculate the net present value of the loan excluding
flotation costs.
2.Calculate the net present value of the loan including
flotation costs.
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