You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $20 million face value of 10-year debt. You have the following data for each:A public issue: The interest rate on the debt would be 8.5%, and the debt would be issued at face value. The underwriting spread would be 1.5%, and other expenses would be $90,000.A private placement: The interest rate on the private placement would be 9%, but the total issuing expenses would be only $40,000. Required:(a.) What is the difference in the proceeds to the company net of expenses?(b.) Other things being equal, which is the better deal?

The public issue represents the shares that are issued to the public. Whereas, private placement is…

Answered: You need to choose between making a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $20 million face value of 10-year debt. You have the following data for each:

A public issue: The interest rate on the debt would be 8.5%, and the debt would be issued at face value. The underwriting spread would be 1.5%, and other expenses would be $90,000.
A private placement: The interest rate on the private placement would be 9%, but the total issuing expenses would be only $40,000.

Required:

(a.) What is the difference in the proceeds to the company net of expenses?

(b.) Other things being equal, which is the better deal?

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