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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)?

#### 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