Assignment:
You need to choose between making a public offering and arranging a private placement. In each case the issue involves $10 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 8.5 percent, and the debt would be issued at face value. The underwriting spread would be 1.5 percent and other expenses would be $80,000.
A private placement: The interest rate on the private placement would be 9 percent but the total issuing expenses would be only $30,000.
a. What is the difference in the proceeds to the company net of expense?
b. Other things being equal, which is the better deal?
c. What other factors beyond the interest rate and issue costs would you wish to consider before deciding between the two offers?
Provide complete and step by step solution for the question and show calculations and use formulas.