A public issue of $10 million face value of 10-year debt. The interest rate on t
ID: 2650447 • Letter: A
Question
A public issue of $10 million face value of 10-year debt. The interest rate on the debt would be 11.0%, and the debt would be issued at face value. The underwriting spread would be 1.5%, and other expenses would be $86,000.
A private placement of $10 million face value of 10-year debt. The interest rate on the private placement would be 11.5%, but the total issuing expenses would be only $42,000.
Calculate the net proceeds of public issue. (Enter your answer in dollars not in millions.)
You need to choose between the following types of issues:
Explanation / Answer
a-1. Calculation of Net Proceeds of Public Issue:
Amount of Public Issue = 10,000,000
Less: Underwriting Spread= 1.5%
10,000,000 x 1.5% = 150,000
Less: Other Expenses = 86,000
Net Proceeds = 10,000,000 - 150,000 - 86,000 = $9,764,000
a-2. Calculation of Net Proceeds from Private Placement:
10,000,000- 42,000 = $9,958,000
b. option of Private Placement is better because Net Proceedings are more than Public issue.
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