Question:
A company is trying to raise $43 million of external funding. Would there be financial leverage and what kind of financial leverage would be present if a company could issue bonds in the capital market, preferring a bond issue over bank financing because of the restrictions the bank imposes with its standard loan covenants. Among the restrictions would be a prohibition on the acquisition of other companies while the loan is outstanding. If the company plans to continue its 14% rate of growth through acquisitions and such a restriction would force the company to develop a new strategic plan. A sinking fund will be invested at 5% annual interest, the annual payments that must be contributed to the account for each of the ten years is $3,418,696.72 and the company can expect to see the following proceeds at each one of the following rates:
7.00% $34,511,174.73
7.50% $35,818,354.48
8.00% $37,125,534.22
8.50% $38,432,713.97
9.00% $39,739,893.71
9.25% $40,393,483.59
9.50% $41,047,073.46
10.00% $42,354,253.21
10.25% $43,000,000.00
10.50% $43,661,432.95
What rate would they issue the bonds? And what kind of financial leverage would the company have be issuing these bonds?