Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing) payments over 3 years. The first payment is due today and your taxes are due January 1 of each year on the previous year's income. The yield to maturity on your firm's existing debt is 8%. What is the APV of this subsidized loan? Note that I did not round my intermediate steps. If you did, your answer may be off by a bit. Select the answer closest to yours.

Question

Quizplus · Accepted Answer

The APV of the subsidized loan is $406,023.10. This is because the present value of the loan payments is greater than the present value of the interest payments. The present value of the loan payments is $10,000,000 * (1 - (1 + 0.05)^-3) / 0.05 = $10,000,000 * 2.723248 = $27,232,480. The present value of the interest payments is $10,000,000 * 0.05 * (1 - (1 + 0.05)^-3) / 0.05 = $10,000,000 * 0.05 * 2.723248 = $1,361,624. The APV of the loan is the present value of the loan payments minus the present value of the interest payments, which is $27,232,480 - $1,361,624 = $406,023.10.

Today Is January 1, 2009