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 an 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 semiannually 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?
** Please see the attached file for the complete solution response **
The after tax cost of borrowing is the after tax yield to maturity on the borrowing
alternatives. The YTM is the discounting rate that will make the present value of
interest and principal equal to the issue price, net of flotation costs. ...
This solution explains how to calculate the after tax cost of borrowing alternatives in the given finance problem. It provides the computations in an attached Excel file.