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 $   

Explanation / Answer

Interest Expenses on Public debt = 10,900,000*8.95% = 975,550

Interest Expenses on Privare debt = 10,900,000*9.90% = 1079100

Extra Interest Expenses = 1079100-975500

Extra Interest Expenses = 103600

PV of extra interest on private placement = Extra Interest Expenses *(1-(1+r)^-n)/r

PV of extra interest on private placement = 103600*(1-(1+8.95%)^-10)/8.95%

PV of extra interest on private placement = $ 666,335.09

Answer

PV of extra interest on private placement = $ 666,335.09

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