Eagle Sports Products (ESP) is considering issuing debt to raise funds to financ

Question

Eagle Sports Products (ESP) is considering issuing debt to raise funds to finance its growth during the next few years. The amount of the issue will be between $35 million and $40 million. ESP has already arranged for a local investment banker to handle the debt issue. The arrangement calls for ESP to pay flotation costs equal to 7 percent of the total market value of hte issue. a. compute the flotation costs that ESP will have to pay if the market value of hte debt issue is $39 million b. If the debt issue has a market value of $39 million, how much will ESP be able to use for its financing needs? That is, what will be the net proceeds from the issue for ESP? assume that the only costs associated with the issue are those paid to the investment banker. c. If the company needs $39 million to finance its future growth, how much debt must ESP issue?

Explanation / Answer

a.
Flotation costs that ESP will have to pay if the market value of hte debt issue is $39 million =
= 7% of 39 million = $ 2.73 million

b.Net proceeds from the issue for ESP = 39 - 2.73 = $ 36.27 millions

c. If the company needs $39 million to finance its future growth,
Debt the company must issue= (39 / 0,93) = $ 41.93548 millions ~ $41.94 millions

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.