Stephens Security has two financing alternatives
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A2. (Comparing borrowing costs) 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)?
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Solution Summary
The solution examines two financing alternatives for Stephens Security. The expert compares borrowing costs and the annual percentage yield.
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ANSWERS
Please see attached file for answers.
Option 1 has the lower cost with an annual percentage yield 9.22% compared to 9.36% for option 2.
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