Stephens Security has two financing alternatives: (1) A publiclyplaced $50 milli

Question

Stephens Security has two financing alternatives: (1) A publiclyplaced $50 million bond issue. Issuance costs are $1 million, thebond has a 9% coupon paid semiannually, and the bond has a 20-yearlife. (2) A $50 million private placement with a large pensionfund. Issuance costs are $500,000, the bond has a 9.25% annualcoupon, and the bond has a 20-year life.
Which alternative has the lower cost (annual percentageyield)? Please show work?
Which alternative has the lower cost (annual percentageyield)? Please show work?

Explanation / Answer

Alternative (1):- Bond value = $50000000 Interest rate = 9% life = 20 years issue cost = $1000000 Cost of Bond:- $1000000+ ($50000000*FVCAF 20years 9%) $1000000+($50000000*51.160) $2559 million Alternative (2):- Bond value = $50000000 Interest rate =9.25% life = 20 yars Issue cost = $500000 Cost of bond:- $500000 + ($50000000*FVCAF 20years 9.25%) $500000 + ($50000000*52.618) $2631.4 million Cost of first alternative is lesserthan the second alternative so it is better to opt thefirst alternative (Note:- FVCAF=Future Value CumulativeAnnuity Factor)

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