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Face Value of Debt

You need to choose between the following types of issues:

? A public issue of $10 million face value of 10-year debt. The interest rate on the debt would be 8.0%, and the debt would be issued at face value. The underwriting spread would be 1.9%, and other expenses would be $83,000.

? A private placement of $10 million face value of 10-year debt. The interest rate on the private placement would be 8%, but the total issuing expenses would be only $39,000.

a-1. Calculate the net proceeds of public issue. (Enter your answer in dollars not in millions.)

Net proceeds of public issue= $ _____________

a-2. Calculate the net proceeds of private placement. (Enter your answer in dollars not in millions.)

Net proceeds of private placement= $ ___________________

b. Other things equal, which is the better deal?

Private placement
Public issue

Solution Preview

a-1. Calculate the net proceeds of public issue. (Enter your answer in dollars not in millions.)

Net proceeds of public issue= $ 9,727,000

Face value: $ 10,000,000

Expenses: ...

Solution Summary

The face value of debt is determined.

$2.19