You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $10.5 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 8.75%, and the debt would be issued at face value. The underwriting spread would be 1.55%, and other expenses would be $85,000. A private placement: The interest rate on the private placement would be 9.5%, but the total issuing expenses would be only $35,000.

Required:
a. Calculate the net proceeds from public issue.
b. Calculate the net proceeds from private placement.
c. Calculate the PV of the extra interest on the private placement.
d. Other things being equal, which is the better deal?

Question

26-01-2022
Business

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You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $10.5 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 8.75%, and the debt would be issued at face value. The underwriting spread would be 1.55%, and other expenses would be $85,000. A private placement: The interest rate on the private placement would be 9.5%, but the total issuing expenses would be only $35,000.

Required:
a. Calculate the net proceeds from public issue.
b. Calculate the net proceeds from private placement.
c. Calculate the PV of the extra interest on the private placement.
d. Other things being equal, which is the better deal?

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anthougo anthougo · Answer 1 · 2022-02-09T11:36:09+01:00

a. The calculation of the net proceeds from the public issue is $10,252,250.

b. The calculation of the net proceeds from the private placement is $10,465,000.

c. c. The present value (PV) of the extra interest of $787,500 on the private placement is $755,966.89, calculated as follows using an online finance calculator:

N (# of periods) = 10 years

I/Y (Interest per year) = 0.75% (9.5% - 8.75%)

PMT (Periodic Payment) = $78,750 ($10.5 million x 0.75%)

FV (Future Value) = $0

Results:

PV = $755,966.89

Sum of all periodic payments = $787,500.00

d. All things being equal, the better deal appears to be the public issue of the debt.

How is a public issue different from a private placement?

A public issuance of shares involves an initial public offering by placing the shares in the stock market so that investors can purchase shares. A private placement pre-selects the investors who will purchase the shares as the offering is not made public.

Data and Calculations:

Public Issuance:

Face value of debt = $10.5 million

Maturity period = 10 years

Interest rate - 8.75%

Underwriting cost = $162,750 ($10.5 million x 1.55%)

Other expenses = $85,000

Total costs = $247,750

Net proceeds = $10,252,250 ($10.5 million - $247,750)

Private placement:

Face value = $10.5 million

Maturity period = 10 years

Interest rate = 9.5%

Total issuing expenses = $35,000

Net proceeds = $10,465,000 ($10.5 million - $35,000)

Learn more about private placement and public issuance at https://brainly.com/question/13139893