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    Choosing Between Two Financing Options

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    1)
    (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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    https://brainmass.com/business/upper-and-lower-bounds-of-options/choosing-financing-options-402237

    Solution Preview

    ** Please see the attached file for the Excel formatted solution **

    Alternative 1

    Face value $50 million
    Issuance costs $1 million
    Coupon 9%
    Interest payments Semi-annual
    Life of bond 20 years

    Period Decsription Amount
    0 Receipts from bond issuance, net $(49.00)
    1 Coupon interest payment $2.25
    2 Coupon interest payment $2.25
    3 Coupon interest payment $2.25
    4 Coupon interest payment $2.25
    5 Coupon interest payment $2.25
    6 Coupon interest payment $2.25
    7 Coupon interest payment $2.25
    8 Coupon interest payment $2.25
    9 Coupon interest payment $2.25
    10 Coupon interest payment $2.25
    11 Coupon interest payment $2.25
    12 Coupon interest payment $2.25 ...

    Solution Summary

    This solution provides a complete computation of the given finance problem in Excel.

    $2.19