DF Ltd wants to raise $20 million. The entity is planning to issue 15-year bonds to raise these funds in either a public issue or a private issue. Option 1: Public issue Coupon rate 10% DF Ltd also needs to pay an underwriting commission of 1% of the gross proceeds. Other preliminary costs: $250,000 Option 2: Private issue Coupon rate 9% Other issue cost of the private placement will be 1.2% of the gross proceeds. Other preliminary costs: $250,000 The bonds will be issued at par and the principal will not be repaid until the maturity date. Assuming a discount rate of 12%, which alternative should the company choose?
DF Ltd wants to raise $20 million. The entity is planning to issue 15-year bonds to raise these funds in either a public issue or a private issue. Option 1: Public issue Coupon rate 10% DF Ltd also needs to pay an underwriting commission of 1% of the gross proceeds. Other preliminary costs: $250,000 Option 2: Private issue Coupon rate 9% Other issue cost of the private placement will be 1.2% of the gross proceeds. Other preliminary costs: $250,000 The bonds will be issued at par and the principal will not be repaid until the maturity date. Assuming a discount rate of 12%, which alternative should the company choose?
Chapter20: Financing With Derivatives
Section20.B: Bond Refunding Analysis
Problem 2P
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DF Ltd wants to raise $20 million. The entity is planning to issue 15-year bonds to raise these funds in either a public issue or a private issue.
Option 1: Public issue
-
Coupon rate 10%
-
DF Ltd also needs to pay an underwriting commission of 1% of the gross proceeds.
-
Other preliminary costs: $250,000
Option 2: Private issue
-
Coupon rate 9%
-
Other issue cost of the private placement will be 1.2% of the gross proceeds.
-
Other preliminary costs: $250,000
The bonds will be issued at par and the principal will not be repaid until the maturity date.
Assuming a discount rate of 12%, which alternative should the company choose?
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