You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $10.4 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 8.7%, and the debt would be issued at face value. The underwriting spread would be 1.54%, and other expenses would be $84,000. A private placement: The interest rate on the private placement would be 9.4%, but the total issuing expenses would be only $34,000. Required: a-1. Calculate the net proceeds from public issue. a-2. Calculate the net proceeds from private placement. b-1. Calculate the PV of the extra interest on the private placement. b-2. Other things being equal, which is the better deal?

You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $10.4 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 8.7%, and the debt would be issued at face value. The underwriting spread would be 1.54%, and other expenses would be $84,000. A private placement: The interest rate on the private placement would be 9.4%, but the total issuing expenses would be only $34,000. Required: a-1. Calculate the net proceeds from public issue. a-2. Calculate the net proceeds from private placement. b-1. Calculate the PV of the extra interest on the private placement. b-2. Other things being equal, which is the better deal?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 22P

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Question

You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $10.4 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 8.7%, and the debt would be issued at face value. The underwriting spread would be 1.54%, and other expenses would be $84,000.
A private placement: The interest rate on the private placement would be 9.4%, but the total issuing expenses would be only $34,000.

Required:

a-1. Calculate the net proceeds from public issue.

a-2. Calculate the net proceeds from private placement.

b-1. Calculate the PV of the extra interest on the private placement.

b-2. Other things being equal, which is the better deal?

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