Eagle Sports Products (ESP) is considering issuing debt to raise funds to finance its growth during the next few years. The amount of the issue will be between $35 million and $40 million. ESP has already arranged for a local investment banker to handle the debt issue. The arrangement calls for ESP to pay flotation costs equal to 7 percent of the total market value of the issue.
a) Compute the flotation costs that ESP will have to pay if the market value of the debt issue is $39 million.
b) If the debt issue has a market value of $39 million, how much will ESP be able to use for its financing needs? That is, what will be the net proceeds from the issue for ESP? Assume that the only costs associated with the issue are those paid to the investment banker.