Question

Ou 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%, and the debt would be issued at face value. the underwriting spread would be 1.5%, and other expenses would be $80,000. a private placement: the interest rate on the private placement would be 9%, but the total issuing expenses would be only $30,000.

Required:
Calculate the net proceeds from public issue.

Answer 1

To calculate the net proceeds from the public issue, subtract the total expenses, including the underwriting spread of $150,000 and other expenses of $80,000, from the face value of the debt. This results in net proceeds of $9,770,000 for the public issue.

Step-by-step explanation:

To calculate the net proceeds from a public issue of a $10 million face value of 10-year debt with an interest rate of 8.5%, issued at face value, we must account for the underwriting spread and other expenses. The underwriting spread is 1.5% of the face value, and other expenses amount to $80,000. Here's the calculation:

• Face value of debt = $10,000,000
• Underwriting spread = 1.5% of $10,000,000 = $150,000
• Other expenses = $80,000
• Total expenses = Underwriting spread + Other expenses = $150,000 + $80,000 = $230,000
• Net proceeds = Face value of debt - Total expenses = $10,000,000 - $230,000 = $9,770,000

Therefore, the net proceeds from the public issue would be $9,770,000.