Comparing Borrowing Costs A2. Stephens Security has two financing alternatives:

Question

Comparing Borrowing Costs
A2. Stephens Security has two financing alternatives: (1) Apublicly placed $50 million bond issue. Issuance costs are $1million, the bond has a 9% coupon paid semiannually, and the bondhas a 20-year life. (2) A $50 million private placement with alarge pension fund. Issuance costs are $500,000, the bond has a9.25% annual coupon, and the bond has a 20-year life.
Which alternative has the lower cost (annual percentageyield)?

A2. Stephens Security has two financing alternatives: (1) Apublicly placed $50 million bond issue. Issuance costs are $1million, the bond has a 9% coupon paid semiannually, and the bondhas a 20-year life. (2) A $50 million private placement with alarge pension fund. Issuance costs are $500,000, the bond has a9.25% annual coupon, and the bond has a 20-year life.
Which alternative has the lower cost (annual percentageyield)?

Explanation / Answer

Par Value 50,000,000 Interest per year(9%) 4,500,000 Total Interest paid 90,000,000 Issuance Cost 1,000,000 Total Cost 91,000,000

Par Value 50,000,000 Interest per year(9.5%) 4,750,000 Total Interest paid 95,000,000 Issuance Cost 500,000 Total Cost 95,500,000
After the calculation, you will find the cost of first one is4.5 million lower than the second one. So, the bond with 9% annualpercentage yield have the lower cost. Par Value 50,000,000 Interest per year(9%) 4,500,000 Total Interest paid 90,000,000 Issuance Cost 1,000,000 Total Cost 91,000,000

Par Value 50,000,000 Interest per year(9.5%) 4,750,000 Total Interest paid 95,000,000 Issuance Cost 500,000 Total Cost 95,500,000

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