You need to choose between making a public offering and arranging a private plac

Question

You need to choose between making a public offering and arranging a private placement. In each case the issue involves $9.7 million face value of 10-year debt. You have the following data for each:

You need to choose between making a public offering and arranging a private placement. In each case the issue involves $9.7 million face value of 10-year debt. You have the following data for each:

Explanation / Answer

a>Net Proceeds from Public Issue=9700000-0.0163*9700000-77000 9464890 b>Net Proceeds from Private Issue=9700000-27000 9673000 c>PV of extra interest paid on private placement Interest per annum=(8.7-8.35)*9700000/100 33950 PV of annuity (33950,8.7%,10) Interest factor=F=(1.087^10)-1 1.303 PV of annuity (33950,8.7%,10)=33950*(F-1)/F*i=33950*(1.303-1)/(1.303*0.087) 90744 d>Difference in proceed between Private Placement and Public Issue=9673000-9464890 208110 The extra proceed from Private placement offsets the extra interest payment by 117366 (i.e. 208110-90744) and so private placement is a better option.

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