Purchase Solution

How Corporations Issue Securities : Interest Rate, Issue Cost and Company Expense, Private Placements and Public Issues

Not what you're looking for?

Ask Custom Question

You need to choose between making a public offering and arranging a private placement. In each case the issue involves $10 million face value of 10-year debt. You have the following data for each:

A public issue: The interest rate on the debt would be 8.5 percent, and the debt would be issued at face value. The underwriting spread would be 1.5 percent and other expenses would be $80,000.

A private placement: The interest rate on the private placement would be 9 percent but the total issuing expenses would be only $30,000.

a. What is the difference in the proceeds to the company net of expense?

b. Other things being equal, which is the better deal?

c. What other factors beyond the interest rate and issue costs would you wish to consider before deciding between the two offers?

Purchase this Solution
Solution Summary

How Corporations Issue Securities, Interest Rate, Issue Cost and Company Expense, Private Placements and Public Issues are investigated. The solution is detailed and well presented.

Solution Preview

a.
1). A public issue:
net of expense = I(interest) + O(othe expense) = $10million *0.085*10 + 80,000 = 8,580,000
proceeds to the company = gross sales - underwriting spread - net of expense = $10million - 0.015 * $10million - 8,580,000 = $1,270,000
2). Private placement:
net of expense = I(interest) + O(othe expense) = $10million * 0.09 * 10 + $30,000 = 9,030,000
proceeds to the company = gross sales - underwriting spread - net of expense = $10million - 9,030,000 = 970,000

b. In terms of the proceeds to the company, public issue is better.

c. Private placement bonds differ from publicly offered bonds in three key areas: (1) the
design of bond covenants, (2) credit monitoring, and (3) the relatively ease of renegotiation.

private debts, whose terms could be modified throughout the life of the debt contract upon mutual agreement between the borrower and the
lender, are more likely to have restrictive covenants than public debts. In fact, in a public ...

Purchase this Solution
Free BrainMass Quizzes
Know Your Linear Equations

Each question is a choice-summary multiple choice question that will present you with a linear equation and then make 4 statements about that equation. You must determine which of the 4 statements are true (if any) in regards to the equation.

Solving quadratic inequalities

This quiz test you on how well you are familiar with solving quadratic inequalities.

Geometry - Real Life Application Problems

Understanding of how geometry applies to in real-world contexts

Graphs and Functions

This quiz helps you easily identify a function and test your understanding of ranges, domains , function inverses and transformations.

Exponential Expressions

In this quiz, you will have a chance to practice basic terminology of exponential expressions and how to evaluate them.

View More Free Quizzes
Related BrainMass Solutions

  • Finance questions on different concepts

    In a private placement, securities are sold to private (individual) investors rather than to institutions. B. Private placements occur most frequently with stocks, but bonds can be sold in private placement. C.

  • Internal Capital Market and External Capital

    Question 11 Private placements is the offering of financial securities that to few and select investors as opposed to the public. This means that only invited investors are allowed to purchase these securities.

  • Long term Financing alternatives for a proposed overseas production facility

    Corporations benefit by issuing bonds because the interest rates they must pay investors are generally lower than rates for most other types of borrowing and because interest paid on bonds is considered to be a tax-deductible business expense.

  • Multiple choice

    In a private placement, securities are sold to private (individual) investors rather than to institutions. b. Private placements occur most frequently in stock issues, but bonds can also be sold by private placement. c.

  • Primary and Secondary Market Analysis for Raising Capital

    In larger companies like General Mills if they can present a stable and solid debt repayment to investors they may consider taking the loan at a lower interest rate.

  • Finance Terms - Fill in the Blanks

    17852 Finance Terms - Fill in the Blanks Fill in the blanks by choosing the appropriate term from the following list: lease, funded, floating-rate, eurobond, convertible, subordinated, call, sinking fund, prime rate,private placement, public issue,

  • which source of capital would you recommend

    Private placements are an attractive alternative for growing companies. Private placement or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds.

  • Cost of borrwing 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.

  • Organizations associated with the public accounting professi

    421549 Match organizations associated with the public accounting profession's actOrganizations associated with the public accounting profession Several private and public sector organizations are associated with the profession.

View More Related Solutions