Question

Please help me answer question 3.

You need to choose between making a public offering and arranging a private placement. In each case the issue involves $10 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 $80,000. A private placement: The interest rate on the private placement would be 9%, but the total issuing expenses would be only $30,000. 1. Calculate the net proceeds from public issue. (9,770,000] 2. Calculate the net proceeds from private placement. [9,970,000] 3. Calculate the PV of extra interest on private placement. 4. Other things being equal, which is the better deal?

Answer 1

eneo Calculation of net proceeds from public issu = Issue price - underwriting Expense - other Ext = 1,00,60,000 - (100,00,000x 1:59.) - 80,000 =997.70,000 a Calulation of Nel proceeds from private placement = Issue price - issue exp. = 1,00,00, 000 – 30,000 - =$99.70,0000 Presen value of extra interest on private placemento Exto a interest would be = 1,00,00,000x (9%-8.5%. -$50,000 year. Piv. = Extra interest & Piv. factor of loyears at 9% - 50,000 x choose to change towaneen (1.0910 ... + L 50,000 X 6.42 = 3,21,000 - in het proceeds from option I = 97,70,000 Cat present value) Net proceeds from option 2=99,70,000 - 3,21,000 = 96,49,000 I Cat present value]

due due to Therefore option I will be preferred high net proceeds at present value-

Answer 2

All of the answer above is correct, except for c, PV Factor.

c) PV factor of 10 years: consider the interest rate of public placement, 8.5% instead of 9%

(1-(1+r)^-n)/r, where r is 8.5%