Nutty Hospital wishes to advance-refund its existing 15-percent long-term debt. The present $30,000,000 is not callable until five years from today. The payout on the issue over the next five years is as presented in Table 20–15.
|End of year 1||$4,500,000||$1,000,000||$5,500,000|
|End of year 2||$4,350,000||$1,000,000||$5,350,000|
|End of year 3||$4,200,000||$1,000,000||$5,200,000|
|End of year 4||$4,050,000||$1,000,000||$5,050,000|
|End of year 5||$3,900,000||$1,000,000||$4,900,000|
At the end of the fifth year, the debt ($25,000,000 outstanding balance at that time) may be called with a ten percent penalty. If present interest rates are ten percent and the investment rate on the funds to be received from the new issue cannot exceed ten percent, what amount must Nutty Hospital borrow today? Assume that underwriting fees and other issuance costs will be five percent of the issue and that all debt service on the old issue must be met from the proceeds of the refunding issue and related investment income.
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