Purchase Solution

Borrowing costs for two options

Not what you're looking for?

Ask Custom Question

Stephens Security has two financing alternatives:

(1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20 year life.

(2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20 year life. Which alternative has the lower cost (annual percentage yield)?

Please assist with step by step instructions to see how problem is solved.

Purchase this Solution
Solution Summary

The solution explains how to calculate the borrowing costs for two options

Solution Preview

See attached file.

Alternative 1
The cost is the YTM on the bonds. The amount received is $49 million. The semi annual interest is 50,000,000 X 9%/2 = 2,250,000 and the semi annual periods are 40. Interest is an annuity and so we use the ...

Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Motivation

This tests some key elements of major motivation theories.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

View More Free Quizzes
Related BrainMass Solutions

  • Lease vs purchase of equipment

    Is there a sales tax issue which might be different for the two options? 4. Are there more install costs in one option as compared to the other?

  • Comparing borrowing costs - A2

    251656 Comparing borrowing costs - A2 Stephens Security has two financing alternatives (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life.

  • Floating vs Fixed rate, Interest rate swap, Hedging

    73042 Borrowing at Floating vs Fixed rate, Interest rate swap, Hedging alternatives 1. Two Lips, Limited, a Dutch bulb exporter, needs to borrow $40,000,000 for three years.

  • Capital Structures to Maximize the Return on Equity

    Also assume your borrowing costs will rise as you employ more debt in your capital structure. a) Calculate ROE for the following combinations of capital structure and borrowing costs.

  • Short-term financing options

    Disadvantages are that there are costs involved and it may reduce a company's scope of borrowing because book debts would not be available for borrowing. Short-term business loans Most businesses experience slow times now and then.

  • Comparing Short-Term Financing Options for the Kellogg Company

    Borrowing for one year, calculate the APY for each bank loan alternative. d. Which is cheaper, issuing commercial paper or borrowing from the bank? Are there any options that might affect the value of one alternative or the other? 3.

  • Comparing borrowing costs - Stephens Security

    The solution compares borrowing cost for Stephens Security who have two financing alternatives.

  • Arbitrage with Forward and Option Contracts

    Assume the size of forward and options contracts to be 1,000,000 Euros each. Ignore borrowing costs. Currently: Sell a forward contract to deliver 1,000,000 Euros 180 days from now at the exchange rate of 1.3348.

  • Financing foreign operations - Bonds

    In order to find the least expensive option, we need to compare the Yield to Maturity (YTM) of the two options. The YTM is nothing but the IRR or the rate of return available for a given market price.

View More Related Solutions