Borrowing Alternatives
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Exxon Mobil has a 34% tax rate and has decided to issue $100 million of seven-year debt. It has three alternatives. A U.S. public offering would require a 8% coupon with interest payable semiannually and $900,000 of flotation expense. A U.S. private placement would require an 8-3/8% coupon with interest payable semi-annually and $500,000 of flotation expense. A Eurobond offering would require an 8-1/8% coupon with interest payable annually and $1,100,000 of flotation expense.
a. Calculate the after-tax cost of borrowing for each alternative.
b. Which alternative has the lowest cost of borrowing?
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Solution Summary
This solution calculates the after-tax cost of borrowing for each alternative, and determines which alternative has the lowest cost of borrowing.
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Question A)
US public offering
Total interest cost = $100 million x 8% per year x 7 years = $56 million
Total after tax cost of borrowing = ($56 million + ...
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