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 $10.9 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 8.95%, and the debt would be issued at face value. The underwriting spread would be 1.59%, and other expenses would be $89,000.

A private placement: The interest rate on the private placement would be 9.9%, but the total issuing expenses would be only $39,000.

Calculate the PV of extra interest on private placement. (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.)

PV of extra interest $   

You need to choose between making a public offering and arranging a private placement. In each case the issue involves $10.9 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 8.95%, and the debt would be issued at face value. The underwriting spread would be 1.59%, and other expenses would be $89,000.

A private placement: The interest rate on the private placement would be 9.9%, but the total issuing expenses would be only $39,000.

Calculate the PV of extra interest on private placement. (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.)

PV of extra interest $   

Explanation / Answer

Extra interest on private placement = (9.9% - 8.95%)* 10,900,000 * 10 years = 1,035,500

Present value of extra interest on private placement = PV (1,035,500,10,8.95%) = $ 439,417.91

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