13.4 Sandlot Co. needs to borrow $17 million for a factory equipment upgrade. Ma

Question

13.4

Sandlot Co. needs to borrow $17 million for a factory equipment upgrade. Management decides to sell 10-year bonds. They determine that the 3-month Treasury bill rate is 3.84 percent, the firm’s credit rating is Baa, and the yield on 10-year Treasury bonds is 1.36 percent higher than that for 3-month Treasury bills. Bonds with a Baa rating are selling for 75 basis points above the 10-year Treasury bond rate.

What is the borrowing cost to do this transaction? (Round answer to 2 decimal places, e.g. 15.21.)

Borrowing Cost: _________ %

Explanation / Answer

Rate on 10 year Treasury Bonds=1.36%+3 month TBill rate=1.36%+3.84%=5.20%
Rate on Baa Bonds=0.75%+10year Treasury Bonds rate=0.75%+5.20%=5.95%
So, borrowing cost=5.95%

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