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 9.2% annual coupon, and the bond has a 20 year life. Which alternative has the lower cost (annual percentage yield)?
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If we look at the first financing option we can find that the cost of financing for the company is:
Issuance cost=$1 million
Coupon rate=9% paid semiannually
So, annual percentage ...
The solution examines capital structures for Stephens Security.